tag:blogger.com,1999:blog-71003568545250151282023-11-15T19:32:04.568-08:00Funds GardenA place to learn about Canadian investing. This site offers education, and is not direct investment advice. Our goal: informative, quantitative, evidence based, and balanced (and always free). What funds grow in your balanced investment garden?Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.comBlogger24125tag:blogger.com,1999:blog-7100356854525015128.post-65726401736182709012018-07-06T06:46:00.000-07:002018-08-03T12:41:18.869-07:00Review: Good Bad and Downright Awful in Canadian Investments Today<div class="separator" style="clear: both; text-align: center;">
<a href="https://www.amazon.ca/gp/product/0385667450?ie=UTF8&tag=bayfunnet-20&camp=15121&linkCode=xm2&creativeASIN=0385667450" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;" target="_blank"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6KHsl1JK-gOkmJWQpGRYxe7qmqtaHK5jS-DTMx91503GEhS2AObvvoM5gbhDqFQX-wWE2FrybukCaK4wkm2388_A0UCquA5syHhJ4Prdgr6eelp5al_lFV0grpEglK260w65eOHYfdlM/s200/CarrickGoodBadAwful.png" width="137" /></a></div>
Rob Carrick is arguably Canada's best known financial writer. He describes his column in the Globe and Mail this way: "one regular guy’s attempt to make sense of the world of money." He has been writing about financial issues for about 25 years, and has been the <a href="https://www.theglobeandmail.com/authors/rob-carrick/">Globe and Mail's Personal Finance columnist </a>since that feature began.<br />
<br />
I daily read his contributions in the Globe & Mail, finding his writing direct, clear, well researched and valuable. I also follow him on Twitter (his handle is <a href="https://twitter.com/rcarrick">@rcarrick</a>). As I have noted a number of times on this blog, I find his annual <a href="https://www.theglobeandmail.com/globe-investor/best-canadian-etf-carrick/article37898302/">ETF Guides</a> a valuable resource for Canadian investors.<br />
<br />
Not long ago I finally got around to reading his book <a href="https://www.amazon.ca/gp/product/0385667450?ie=UTF8&tag=bayfunnet-20&camp=15121&linkCode=xm2&creativeASIN=0385667450" target="_blank">Rob Carrick's Guide to What's Good, Bad and Downright Awful in Canadian Investments Today</a> (Doubleday Canada, 2009 ISBN 978-0385667456). The book is available in both <a href="https://www.amazon.ca/gp/product/0385667450/ref=as_li_tl?ie=UTF8&camp=15121&creative=330641&creativeASIN=0385667450&linkCode=as2&tag=bayfunnet-20&linkId=5bceb087afe71866297ae6fdcbbaf673" target="_blank">Kindle</a> and printed formats. Although the book was written some years ago, it has not been updated, although he has written a more recent book aimed at millenials: <a href="https://www.amazon.ca/gp/product/038567192X?ie=UTF8&tag=bayfunnet-20&camp=15121&linkCode=xm2&creativeASIN=038567192X" target="_blank">How Not to Move Back in With Your Parents: The Young Person's Complete Guide to Financial Empowerment</a> (Doubleday Canada, 2012).<br />
<br />
<h3>
What's Good</h3>
<div>
<br /></div>
Rob Carrick is noted for his direct, clear and well-researched writing. As the title implies, he is not afraid to sharply criticize when he feels the criticism is warranted. I would say that the direct and open approach is the greatest strength of the book. If you like his columns in the Globe, you will like this book, as the tone is not surprisingly similar.<br />
<br />
The book is positively reviewed on Amazon, with a rating of better than 4/5 stars. Most comment on the succinct, direct and clear writing style, with occasional use of humour. Several reviewers do point out that this is essentially a book for those getting started in investing, and it should be followed up with a more detailed and current book.<br />
<br />
A true Canadian investing champion, Dan Bortolotti, CFP, CIM of <a href="https://canadiancouchpotato.com/">Canadian Couch Potato fame</a>, had this praise for Carrick and this book <a href="https://canadiancouchpotato.com/2010/01/30/review-rob-carricks-guide-2/">in a review</a>:<br />
<blockquote class="tr_bq">
<i>"Rob Carrick is one of a small number of journalists who stand up for individual investors in this country. If you’re not a regular reader of his columns in the Globe and Mail, I encourage you to start. His latest book, Rob Carrick’s Guide to What’s Good, Bad and Downright Awful in Canadian Investments Today (Doubleday Canada), is classic Carrick: straightforward, easy to read advice that doesn’t kiss any asses in the financial industry. The book is perfect for browsing, because it’s organized into lists such as “Seven dumb rookie mistakes investors make and how to avoid them,” and “Ten signs of a rotten adviser.” Here’s one of his assessments: “If an adviser isn’t an indexing adherent, then he or she should at least recognize the value of this investing approach. The test is whether an adviser trashes indexing, and many will. If this happens, then keep looking.”</i></blockquote>
<br />
<h3>
Keep in Mind</h3>
<div>
<br /></div>
Do keep in mind that this book was written about ten years ago, so the details of things like MER are not current(fortunately expenses in the investing world have come down dramatically in the last few years). Also, there are even better ETF choices than at the time this book was written (and far more ETF possibilities for Canadians). Therefore while you should read this book for general advice, not as a practical guide to specific investments. Also, while you will find some new gems in his listing of online resources, his list reflects, naturally, the era when this book was written.<br />
<br />
<h3>
Final Thoughts</h3>
<div>
<br /></div>
If you are just starting out investing, do read this book. For a beginning Canadian investor I would place this book in the first ten books to be read. If you don't want to <a href="https://www.amazon.ca/gp/product/0385667450?ie=UTF8&tag=bayfunnet-20&camp=15121&linkCode=xm2&creativeASIN=0385667450" target="_blank">buy your own copy</a>, you can probably find it at your local library or inexpensively at a used bookstore - don't feel too badly about Rob Carrick missing out on additional royalties, I suspect that he would be happy that you are being frugal and saving money!<br />
<br />
In<a href="http://fundsgarden.blogspot.ca/2017/04/review-portfolio-first-aid.html" target="_blank"> an earlier review of a different book</a>, I mentioned that after reading a book I ask myself the following four questions.<br />
<ol>
<li>Was my time invested in the book, time well spent?</li>
<li> Do I have confidence in the validity and balance in the presentation? </li>
<li>Was I engaged in the book? </li>
<li>What were the author's motives in writing the book? </li>
</ol>
<div>
I enthusiastically answer YES to the first three questions. This book is a quick read (at least for those with even a modest investing background), and I felt my reading time was indeed time well spent. Even if you consider yourself an experienced investor, you will still find value in this book. <br />
<br />
While I don't always agree with everything Rob Carrick writes (in this book or in his columns in the Globe), I do have confidence that he genuinely cares about the welfare of Canadians, and that he has thought out and researched what he writes. While he does express strong opinions, I do feel that there is balance in his writing. While any author hopes to have some financial success with a book, I feel that Rob Carrick, first and foremost, wants to help individual investors have success and avoid blunders. He wants them to be empowered to make good financial decisions.<br />
<br />
As well as this book, check out <a href="http://www.robcarrick.com/" target="_blank">Rob Carrick's website</a> which links to his books, and tells you more about his background.<br />
<br />
On his <a href="http://www.robcarrick.com/" target="_blank">website</a> Rob Carrick promotes his writing this way:<br />
<blockquote class="tr_bq">
<i>"My willingness to challenge stale consensus thinking and, most of all, my ability to make you say after finishing one of my columns: 'Now I understand.'"</i></blockquote>
Indeed that would be a good description for the content of this book.<br />
<br />
So why not give <a href="https://www.amazon.ca/gp/product/0385667450?ie=UTF8&tag=bayfunnet-20&camp=15121&linkCode=xm2&creativeASIN=0385667450" target="_blank">Rob Carrick's Guide to What's Good, Bad and Downright Awful in Canadian Investments Today</a> a read? While many years since publication, it is readily available in both new and used forms. If you have not already read the book, put it on your list for summer investment reading. It will be time well spent! While details like specific investment products and costs change over time, the sound investment principles Rob Carrick advocates in this book are timeless. </div>
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<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions. The writer is not a professional financial planner or investment advisor. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
<div>
<i><br /></i></div>
<div>
<i>Disclosure: No compensation by any company, organization or individual has been offered, requested or received for writing this column. We do however belong to affiliate programs for some of the links that you find in our articles, details available upon request.</i><br />
<i><br /></i><i>Books for Review: I will not promise a positive, or even any, review, but if you wish to submit your investment book for me to consider, contact me rhawkes (at) chignecto.ca. I am particularly interested in Canadian books.</i></div>
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<br />Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-45385052736053402442018-07-04T17:45:00.001-07:002018-08-03T12:48:36.205-07:00Review: A Wealth of Common Sense<br />
Ben Carlson is an investment writer who consistently has something important to say and expresses it in an engaging way. Each morning I eagerly await his new post in my email, and he is one of the financial writers that I follow most closely on Twitter. I am in awe at the volume and quality of his writing.<br />
<br />
<a href="https://www.amazon.ca/gp/product/1119024927/ref=as_li_tl?ie=UTF8&tag=bayfunnet-20&camp=15121&creative=330641&linkCode=as2&creativeASIN=1119024927&linkId=ea763b43a782ad40a0fc52561f502245" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;" target="_blank"><img border="0" data-original-height="354" data-original-width="244" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSb8lFq10mEhoBLmX6UkSiOqWHd1BjXhNIe5tgWutAROIsFku8P03L9XLSzdZrDj-A7Bo0KMmaFad812WtO9Ev09TmTW0kABcpTF9Ya6owE_rzYa5OfU9SPtFM5DTB7nkloHOGD74_XCk/s200/WealthCommonSense.png" width="137" /></a>Ben is Director of Institutional Asset Management at <a href="http://ritholtzwealth.com/" target="_blank">Ritholtz Wealth Management</a>. He has authored both the book reviewed here, <i><a href="https://www.amazon.ca/gp/product/1119024927?ie=UTF8&tag=bayfunnet-20&camp=15121&linkCode=xm2&creativeASIN=1119024927" target="_blank">A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan</a></i>, and also <i><a href="https://www.amazon.ca/gp/product/1541043677?ie=UTF8&tag=bayfunnet-20&camp=15121&linkCode=xm2&creativeASIN=1541043677" target="_blank">Organizational Alpha: How to Add Value in Institutional Asset Management</a></i>. Ben Carlson has been recognized in numerous awards, including being chosen in 2017 for <i>Investment News 40 Under 40</i>. You can <a href="http://awealthofcommonsense.com/about-2/" target="_blank">read more about his background on his website</a>.<br />
<br />
Ben Carlson and Michael Batnick, also of Ritholz Wealth Management, have a weekly podcast that goes by the unusual title <i><a href="http://awealthofcommonsense.com/podcast/" target="_blank">Animal Spirits</a></i>. The style of the podcast is very different from that of this book, and from his daily investment posts. I may review the podcast at some future date. I suspect many came to Ben Carlson's considerable social presence after reading one of his books, but for me it was the opposite: I first started reading his blog and twitter posts. I decided it was finally time to seek out his best known book and to do a review on it.<br />
<br />
Sometimes books have clever titles and sometimes they use descriptive titles. This title is both. Essentially the book emphasizes the point that a clear investment plan, patience over the long term, and sound investment choices will yield good long term returns. Success is largely dependent on making good common sense choices, and reigning in our emotions.<br />
<br />
<h3>
Essential Ideas</h3>
<br />
In the introduction to the book he summarizes simple and effective investment advice in the following points.<br />
<ul>
<li>Think and act for the long term.</li>
<li>Ignore the noise.</li>
<li>Buy low, sell high.</li>
<li>Keep your emotions in check.</li>
<li>Don't put all of your eggs in one basket.</li>
<li>Stay the course.</li>
</ul>
As he emphasizes, the challenge is not so much to know those points, essentially common sense, but rather how to follow them.<br />
<br />
In clear engaging language he outlines some of the traits listed below that you must reign in. Here are the key messages, but read the book to get the details.<br />
<ol>
<li>Looking to get rich in a hurry.</li>
<li>Not having a plan in place.</li>
<li>Going with the herd, instead of thinking for yourself.</li>
<li>Focusing exclusively on the short term.</li>
<li>Focusing only on those areas that are completely out of your control.</li>
<li>Taking the markets personally.</li>
<li>Not admitting your limitations.</li>
</ol>
He goes on to provide the flip side - what are the traits of a successful investor?<br />
<ol>
<li>Emotional intelligence.</li>
<li>Patience.</li>
<li>Calm during times of stress.</li>
<li>The ability to say 'I don't know.'</li>
<li>Understand history.</li>
<li>Discipline.</li>
</ol>
<div>
<br /></div>
<h3>
What I Like</h3>
<br />
Ben Carlson devotes considerable attention to dealing with our emotional sides. As he says in the chapter on contrasting individual and institutional investors.<br />
<blockquote class="tr_bq">
<i>"One of the biggest mistakes investors make is letting their emotions get in the way of making intelligent investment decisions."</i></blockquote>
The following chapter is entirely devoted to the traits required to be a successful investor. That chapter opens with this great quote from Charlie Munger:<br />
<blockquote class="tr_bq">
<i>"If you can get good at destroying your own wrong ideas, that is a great gift."</i><br />
<div style="text-align: right;">
-Charlie Munger</div>
</blockquote>
By clearly laying out the key traits of unsuccessful and successful investors, the author has set a superb foundation, with much of the book weaving the details around those points and the evidence for them. I find that this approach works really well.<br />
<br />
Ben Carlson appropriately stresses that in order to get more reward, indeed to get enough reward to overcome inflation, you need to take on some risk. I like the emphasis he places on market history as part of your investment education. That historical emphasis is also one of the <i><a href="https://www.amazon.ca/gp/product/0071747052?ie=UTF8&tag=bayfunnet-20&camp=15121&linkCode=xm2&creativeASIN=0071747052" target="_blank">Four Pillars of Investing</a></i> of Dr. William J. Bernstein (see <a href="https://fundsgarden.blogspot.com/2017/04/review-four-pillars-of-investing.html" target="_blank">my review of that book here</a>). Chapter 4 of <i>A Wealth of Common Sense</i> on market myths and history is one of my favourites. Many of these deal with timing attempts (read the book!), but I will share his fifth myth, which I think is something important that simplistic advice often overlooks: Myth 5 Stocks and bonds always move in different directions (see also Myth 7 which deals with risk inherent in stocks and bonds).<br />
<br />
<i>A Wealth of Common Sense</i> is more scholarly (in a good way!) than many investment books. Each chapter has an extensive list of resources to support the points made, ranging over books, articles and websites. The author clearly reads widely and with an open mind, and that shines through in almost every page of this book.<br />
<br />
In a book that pays attention to the evidence supporting ideas presented, sometimes it is easy to loose track of the key ideas. Ben Carlson guards agains this by including for each chapter a Key Takeaways section, a few bulleted points that emphasize the key ideas of the chapter.<br />
<br />
As would be expected, Ben Carlson stresses the importance of development of an informed financial and investment plan. A part of this is defining yourself as an investor (Chapter 5 has a section with this heading). As he says "...there is never going to be a one-size-fits-all investment philosophy for every person." He suggests that asking yourself questions such as does your investment philosophy match your personality and individual circumstances, and what constraints do the conditions of your life place on that philosophy. <br />
<br />
The book contains many superb pithy quotations, such as the following in a section on The Benefits of Doing Nothing.<br />
<blockquote class="tr_bq">
<i>"Lethargy, bordering on sloth, should remain the cornerstone of an investment style."</i><br />
<div style="text-align: right;">
–Warren Buffett</div>
</blockquote>
I find that the book concludes strongly, with the Exhibit approach in Chapter 6, including gems like the mutual fund graveyard and picking one active fund is hard, followed by Chapter 7 on asset allocation, and then Chapter 8 on a comprehensive investment plan. Chapter 7 provides a solid foundation in evidence, history and principles guiding an appropriate asset allocation for your own personal situation. Chapter 8 includes coverage of lifecycle investing, and the different situations for investors at different stages in life.<br />
<br />
The penultimate chapter looks at the key question of if you should seek professional advice, and how to interact with your financial advisor. His key takeaways for this chapter include advice such as "look for self-awareness and humility, not certainty or guarantees" and "outsourcing to a financial advisor is intelligent behaviour if you don't have the time, expertise, or emotional control to implement an ongoing financial plan."<br />
<br />
The book provides good balance, with sage advice such as the following:<br />
<blockquote class="tr_bq">
<i>"Your investment plan should be designed specifically... for you – build the one you know you will follow. You have to be brutally honest with yourself about your ability to handle risk."</i></blockquote>
<br />
<h3>
</h3>
<h3>
A Few Reservations</h3>
<br />
This is not so much a reservation as a caveat that this is not a simplistic 'how to' investment book. Don't expect it to lead you into precisely what you should do with your investment portfolio. But perhaps that reservation is really a strength – as investors we need to educate ourselves and develop personally appropriate financial and investment plans. While he does not guide you in precise financial products, the author (in Chapter 5) does offer a checklist of the traits of a good fund (applicable to both mutual funds and exchange traded funds). He suggests that you should seek low cost, rules-based and transparent, evidence supported, liquid investments.<br />
<br />
While I liked a lot of the structure of the book, for me at least, I found that Chapter 1, The Individual Investor versus the Institutional Investor, was not the most engaging way to start the text. I would have started with either Chapter 2, on the traits of successful investors, or possibly with the content of Chapter 3 on long term performance and the link of risk and return.<br />
<br />
For Canadians, this book is of course written from a U. S. perspective. Nevertheless, the vast majority of the points made are applicable in different countries and economies. I will be reviewing a few Canadian authored investment books in the coming weeks.<br />
<br />
<h3>
</h3>
<h3>
Concluding Thoughts</h3>
<br />
How is investing like walking into a restaurant? Read the beginning of Chapter 6 to find out! Along the way you will learn some valuable insights about the investment industry.<br />
<br />
Most good books are common sense, and this is no exception. The book is full of concisely presented evidence as well though. For example, in the decade ending in 2013 there were a total of 6911 mutual funds opened, but over the same period 3066 funds were merged, and 3105 were liquidated. Survivorship bias is indeed a thing.<br />
<br />
A message that I fear many investors will need to keep in mind during the coming decade is the following:<br />
<blockquote class="tr_bq">
<i>"The only true guarantee we have in the markets is that things will go wrong and people's perception of risk will be in a constant state of change. Risk is actually more predictable than returns."</i></blockquote>
At the outset of the Conclusion chapter he mentions that someone offered him the following advice as he was writing the book to imagine that his grandmother came to him for investment advice, asking for 10 things that she could understand and that were important. Maybe that explains a lot of why this book is as good as it is! You will need to get the book to see the full list, but number one is "Less is more" and the second is "Focus on what you can control."<br />
<br />
The investing great Warren Buffett once said:<br />
<blockquote class="tr_bq">
<i>"Hang out with people better than you, and you cannot help but improve.'</i><br />
<div style="text-align: right;">
–Warren Buffett</div>
</blockquote>
I strongly encourage you to 'hang out' with Ben Carlson through reading this book! Ben Carlson has 'hung out' with a lot of investment giants, and this book is our shortcut to reaping some of the benefits of that. And since more hanging out with good people is always a good idea, the book ends with a book list of great choices to move onto after this book.<br />
<br />
The 224 page book, published in 2015 by Bloomberg/Wiley, is widely available through bookstores and libraries, or can be <a href="https://www.amazon.ca/gp/product/1119024927?ie=UTF8&tag=bayfunnet-20&camp=15121&linkCode=xm2&creativeASIN=1119024927" target="_blank">purchased through Amazon</a>. It comes in hardcover (ISBN <span style="background-color: white; color: #333333; font-family: "verdana" , "arial" , "helvetica" , sans-serif; font-size: 13px;">978-1119024927)</span>, softcover and Kindle eBook formats.<br />
<br />
Downtown Josh Brown, of The Reformed Broker fame, praises the book and Ben Carlson through these words:<br />
<blockquote class="tr_bq">
<i>"True investing wisdom—born out of experience and success—cannot be faked; it must be earned. This is precisely the type of wisdom that comes oozing out of every chapter in A Wealth Of Common Sense." </i></blockquote>
I totally agree. This book would be in my top 5 investment books for an individual investor. Why not make it part of your summer personal finance and investment reading list?<br />
<br />
<br />
<div style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;">
<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions. The writer is not a professional financial planner or investment advisor. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
<div style="background-color: white; color: #222222; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;">
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<i>Disclosure: No compensation by any company, organization or individual has been offered, requested or received for writing this column. We do however belong to affiliate programs for some of the links that you find in our articles, details available upon request.</i><br />
<i><br /></i><i>Books for Review: I will not promise a positive, or even any, review, but if you wish to submit your investment book for me to consider, contact me rhawkes (at) chignecto.ca. I am particularly interested in Canadian books.</i></div>
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<br />Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-6527929268109543582017-05-18T08:57:00.000-07:002018-08-03T12:56:08.716-07:00Financial Literacy Courses – A Bad Idea?<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmy31j4hQToCA5RuXWnLD6o-5aeWFNUfHKq1IRWH_JXHH3ScJsetHs_UpBuvX-RiZvxk96Fzb3YPEM7goG4o8dxfMlSXsP321lRqhE5WMqlG6pjxtnNQio8nElB7_5l-GUW2NBHNETFPA/s1600/StudentsComputeLaptop-2202670_960_720.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="131" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmy31j4hQToCA5RuXWnLD6o-5aeWFNUfHKq1IRWH_JXHH3ScJsetHs_UpBuvX-RiZvxk96Fzb3YPEM7goG4o8dxfMlSXsP321lRqhE5WMqlG6pjxtnNQio8nElB7_5l-GUW2NBHNETFPA/s200/StudentsComputeLaptop-2202670_960_720.jpg" width="200" /></a></div>
In an <a href="https://t.co/OZ7Zmqq0bE" target="_blank">interview on CBC The 180</a>, <a href="http://www.conferenceboard.ca/topics/inn/staff/daniel-munro.aspx" target="_blank">Daniel Munro, Associate Director, Public Policy at The Conference Board of Canada, and an ethics lecturer at the University of Ottawa</a>, asks the question: Do mandated high school financial literacy courses do more harm than good? I urge you to listen to the podcast of the entire episode, and <a href="http://www.macleans.ca/society/how-financial-literacy-programs-can-do-more-harm-than-good/" target="_blank">read the piece he wrote for Macleans</a> on the same topic, but essentially he bases his argument on three points.<br />
<ol>
<li>As usually structured, such courses give an incorrect view that making good financial choices is all that is important (neglecting circumstances). </li>
<li>The evidence suggests that the positive impact of mandatory financial literacy courses is short lived.</li>
<li>There may be misplaced over-confidence from taking a single financial literacy course, actually contributing to bad financial choices made later in life.</li>
</ol>
In <a href="http://fundsgarden.blogspot.ca/2017/03/we-need-more-personal-finance-and.html" target="_blank">March I argued that we need more financial literacy</a>, and I stand by that assertion. I am glad to see that in various parts of Canada there are new initiatives to support enhanced financial literacy.<br />
<br />
However, I think that Daniel Munro's interview is a wake up call to make sure that we have the right sort of financial literacy education. Also, we must do the research to make sure that financial literacy courses are actually contributing to improved long term outcomes. Let us look at the three points from the Daniel Munro interview.<br />
<br />
(1) He argues that courses, at least as currently formulated in the grade 10 course about to become mandatory in Ontario, place too much emphasis on just one element of financial decisions, making good choices. While clearly good choices matter, he argues that this emphasis in the absence of a consideration of circumstances, is at best incomplete. Circumstances of many types, including family circumstances and obligations, costs of living in your region, educational opportunities, natural abilities, and much more, all contribute to the right financial decision in a situation. In his <a href="http://www.macleans.ca/society/how-financial-literacy-programs-can-do-more-harm-than-good/" target="_blank">Macleans piece Daniel Munro states the case</a> clearly and powerfully as follows:<br />
<blockquote class="tr_bq">
"...fairness and responsibility argue that while people ought to be responsible for what results from their choices, they should not be responsible for what results from circumstances that are beyond their control..."</blockquote>
<br />
(2) With respect to the long term impact of mandated financial literacy courses, he points out in the <a href="http://www.macleans.ca/society/how-financial-literacy-programs-can-do-more-harm-than-good/" target="_blank">Macleans piece</a> that research evidence supports the idea that financial literacy course impact is limited. He mentions a <a href="http://pubsonline.informs.org/doi/pdf/10.1287/mnsc.2013.1849" target="_blank">meta analysis of 168 research papers covering more than 200 studies on effectiveness of financial literacy courses</a>. While I have not read that analysis in detail, I am familiar with this r<a href="http://www.hbs.edu/faculty/Publication%20Files/13-064_c7b52fa0-1242-4420-b9b6-73d32c639826.pdf" target="_blank">eport by Shawn Cole, Anna Paulson, and Gauri Kartini Shastry that looked at the effectiveness of mandated financial literacy courses in the US</a>, where in some states there is a history of sufficient length to study such effects. The report is a white paper of the Harvard Business School, and is entitled <i><a href="http://www.hbs.edu/faculty/Publication%20Files/13-064_c7b52fa0-1242-4420-b9b6-73d32c639826.pdf" target="_blank">High School Curriculum and Financial Outcomes: The Impact of Mandated Personal Finance and Mathematics Courses</a></i>. I quote from part of the abstract of the paper that gives a clear indication of the results:<br />
<blockquote class="tr_bq">
"Financial literacy and cognitive capabilities are convincingly linked to the quality of financial decision-making. Yet, there is little evidence that education intended to improve financial decision-making is successful...this paper answers the question 'Can good financial behavior be taught in high school?' It can, though not via traditional personal finance courses, which we find have no effect on financial outcomes."</blockquote>
Interestingly, the paper goes on to show that more mathematics education <i>can</i> lead to enhanced long term improvements in financial decision making and investment participation.<br />
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(3) We all know that over-confidence can be dangerous, and this certainly applies to financial decision making. Daniel Munro cites a 2014 <a href="http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2015-Amsterdam/papers/EFMA2015_0067_fullpaper.pdf" target="_blank">study by Marc Kramer</a> that found that<br />
<blockquote class="tr_bq">
"...confidence in ones‘ own (financial) literacy is negatively associated with asking for help, while actual expertise does not relate to advice-seeking"</blockquote>
While I firmly believe that finance and investment education is a positive, his remarks remind us that part of that education must be a clear understanding of the limitations of understanding, and the value of seeking advice. As mentioned in <a href="http://fundsgarden.blogspot.ca/2017/03/we-need-more-personal-finance-and.html" target="_blank">my previous post</a>, I prefer a spiral approach to financial education, starting in elementary school and extending throughout life.<br />
<br />
I believe that mathematics education has a longer impact than financial literacy courses due to two factors. Mathematics education tends to be taught in a very active learning mode: most mathematics educators realize that you learn math by doing math (including discovering some relationships on your own), not by having it explained to you. There is an important lesson here for financial literacy teachers.<br />
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The second reason is that mathematics education emphasizes concepts and techniques with broad application, and through those applications it keeps getting used regularly. I think that a similar approach is necessary for successful financial literacy courses, and "one of" financial literacy efforts will be doomed to failure.<br />
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I have been working for some time on a future post that will present my ideas for a different kind of university based financial education course. That will stress active learning, quantitative reasoning, and the link between financial decisions and positive public policy. Sign up to follow this blog and you will receive each new post directly to your email, complete with all hyperlinks (and no advertisements!).<br />
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I would love to hear your opinions, either through the comment section or through an exchange on Twitter.<br />
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<i> The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i><br />
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<i>Added note: I have added material to the original posting based on his Macleans article, and the linked studies therein, that I did not know about at the time of the original posting.</i>Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-68962682256620634712017-05-14T10:12:00.003-07:002018-08-03T12:57:52.181-07:00International Equity ETFs<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgndTXe18VSjZJxxqFlIoXNFxEer07SfvKcwd1axcmupNdspxNaCy8el_Qh7FCwEuePyctCmFRBjEIl8ybJCDVVPoLLw2plBnUf5WVPmKDdkRqtchGAh7_cPVBIOAYNbiJu-8DZ3RYLy8Y/s1600/worldmap_pixabay.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="111" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgndTXe18VSjZJxxqFlIoXNFxEer07SfvKcwd1axcmupNdspxNaCy8el_Qh7FCwEuePyctCmFRBjEIl8ybJCDVVPoLLw2plBnUf5WVPmKDdkRqtchGAh7_cPVBIOAYNbiJu-8DZ3RYLy8Y/s200/worldmap_pixabay.jpg" width="200" /></a></div>
Your <a href="http://fundsgarden.blogspot.ca/2017/02/diversification-dont-grow-only-tomatoes.html" target="_blank">diversified ETF portfolio</a> should include at least <a href="http://fundsgarden.blogspot.ca/2017/03/some-canada-for-your-garden.html" target="_blank">Canadian</a>, <a href="http://fundsgarden.blogspot.ca/2017/05/us-equity-etfs-for-canadians.html" target="_blank">US</a> and International equities and a mix of corporate and government <a href="http://fundsgarden.blogspot.ca/2017/03/can-we-talk-bonds.html" target="_blank">bonds</a> (I also argue that it should be further diversified, with some exposure to REITs and perhaps other investment classes - read details here). As part of the series on how to build up a basic well diversified portfolio, we now look at international ETFs available on the TSX.<br />
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<h3>
Global vs International</h3>
When I started out investing, I was confused by some funds calling themselves global and others international, since in everyday use those words mean the same thing. <a href="http://www.investopedia.com/ask/answers/03/071103.asp" target="_blank">Investopedia differentiate global and international</a> as investing terms. Essentially global includes all countries, while international funds exclude your own country. However, the situation is confused when the perspective is from Canada, and international funds generally mean funds outside North America. Confused? We agree it is confusing! We are going to lump both global and international funds in this posting.<br />
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<h3>
Narrow the Choices</h3>
As we have done in the other categories (see Canadian equities, US equities, broad Canadian bonds), we have narrowed the choices, showing some broadly held good international or global ETFs available on the Canadian market below. In narrowing our choices we looked for widely held, low cost, broadly international products. <br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVEh4rXLTXUWvqQubGis4pJY_EW9PNzE9YU1eQrZKNqdFlLzmbad1q1qHEBIQX1hW4IiugGmLgHp4EJ5ktAbJlrNidCKzsCNN3tnznqhAEz6jusRkUKF7eMD8XsHJ3-rB2xGolY4744hg/s1600/IntlETFs.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="132" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVEh4rXLTXUWvqQubGis4pJY_EW9PNzE9YU1eQrZKNqdFlLzmbad1q1qHEBIQX1hW4IiugGmLgHp4EJ5ktAbJlrNidCKzsCNN3tnznqhAEz6jusRkUKF7eMD8XsHJ3-rB2xGolY4744hg/s400/IntlETFs.png" width="400" /></a></div>
While costs in this category are reasonable, and going lower, they are certainly not as low as in the Canadian or US equity ETFs. If you hold $10,000 in funds in one of these ETFs your annual ETF fees, not counting any purchase or sale commissions, will be about $22. Considering the number of different markets these products operate in, this seems like a good deal to me. If you went to a similar international mutual fund your costs would typically be 5 to 10 times higher.<br />
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It is important to consider the assets in the fund, since funds with relatively small investments usually involve more in trading costs and the difference between bid and ask price will be more significant. Under the assets column we show in millions of dollars the amount invested in each ETF. All of these ETFs are relatively large and heavily traded, so trading margins are not major issues in this category.<br />
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It used to be true that ETFs of this type represented only large and mid capacity stocks, but now the four listed here all have broad exposure across different cap sizes.<br />
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There are two approaches to building up internationally diversified ETFs, one can either invest directly in a large basket of securities, or one can assemble a 'fund of funds' that holds different ETFs that in total represent a broad international index. The <i>FoF</i> column shows that for each ETF. If costs are comparable, there is perhaps an argument in favour of the fund of fund approach, since it makes the relative weights more obvious. With a 'fund of funds' I have showed the number of underlying holdings in brackets.<br />
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It is also important to realize that iShares and Vanguard <a href="http://fundsgarden.blogspot.ca/2017/04/developed-or-emerging-classification.html" target="_blank">follow different international indexes – I explain this here</a>.<br />
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The main other differentiators between ETFs in the table are whether the fund includes Canadian, US and emerging markets. More on this below.<br />
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<h3>
What is In?</h3>
Key questions to ask yourself is whether you want emerging markets within your global/international ETF, and whether you want US and Canadian equities within the fund, or prefer to hold those within separate ETFs. In the table the columns <i>c US</i> and <i>c CAN</i> show whether US or Canadian equities are included. I personally prefer holding US equities outside the world ETF, because the MER ratio on Canadian or US only equities are less than these global ETFs, but work out the costs of each approach for your own situation.<br />
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Another differentiator is whether the fund includes emerging market equity exposure, and that is indicated in the <i>c Em</i> column.<br />
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The most similar of the ETFs shown are iShares XAW and Vanguard Canada's VXC. Both include equities from companies of different sizes, emerging and developed markets, and US (but not Canadian) equities. Either of these, when coupled with a Canadian equity ETF such as XIC or HXT, provides world wide equity exposure.<br />
<br />
Some might argue not to include XEF in the table, since it is confined to developed markets outside North America, without emerging market, Canadian or US content. Nevertheless, holding XEF, one US equity fund, one Canadian equity fund and one emerging market fund would allow you to adjust your holdings in each category.<br />
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<h3>
Other Choices</h3>
Because of their somewhat higher MER, I have not included in the table so-called 'fundamental index' international ETFs such as iShares <a href="https://www.blackrock.com/ca/individual/en/products/239569/?referrer=tickerSearch" target="_blank">CIE</a>. There are definite advantages to these funds, that follow the so called <a href="https://www.blackrock.com/ca/individual/en/investment-ideas/rafi-fundamental-index" target="_blank">RAFI Index</a>, that takes into account sales, book value, cash flow and dividends, and the MER is still low compared to what you will pay for any international mutual fund. I will look at these funds in a later posting. <a href="https://www.blackrock.com/ca/individual/en/products/239447/?referrer=tickerSearch" target="_blank">CBN</a>, which holds a mix of these fundamental funds, is in particular an attractive choice, although at higher cost.<br />
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We have not included US stock exchange listed global and international ETFs, although for some that is a good way to go. For example, VEF is essentially VEA, and the MER is lower if you buy it on the US market (0.07% vs 0.22%). Look into how your discount brokerage handles foreign fund conversions, and whether you can hold cash in US funds within your account, before deciding to go this route.<br />
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There are sound arguments for considering low volatility offerings in this category (<a href="https://www.blackrock.com/ca/individual/en/products/239604/?referrer=tickerSearch" target="_blank">XMW</a> is one of my favourites), and we will consider those in a future posting.<br />
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<h3>
Final Thoughts</h3>
<a href="http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/rob-carricks-2017-etf-buyers-guide-best-global-and-international-funds/article34782427/" target="_blank"> Rob Carrick's excellent guide to international and global ETFs is available here</a>. As always, his commentary is clear, direct and valuable.<br />
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The <a href="http://www.moneysense.ca/save/investing/best-international-etf-2017/" target="_blank">Moneysense 2017 guide to international ETFs is out and available here</a>. They recommend XAW, XEF and VEE (we will cover VEE in a later post dealing with emerging markets ETFs). I would agree with their choices of XAW and XEF, and add VEF to the list, particularly if you are a Scotia iTRADE customer, since it is on their <a href="http://www.scotiabank.com/itrade/en/0,,4200,00.html" target="_blank">list of commission free ETFs</a>. VEE is emerging markets, so not suitable as a sole international/global ETF.<br />
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If you want to combine your US and international in a single ETF, Vanguard VXC and XAW are both excellent choices. VXC is more widely held, while XAW has marginally lower costs.<br />
<br />
It should be kept in mind that <a href="http://fundsgarden.blogspot.ca/2017/04/global-stock-market-capitalization.html" target="_blank">both VXC and XAW under-represent emerging markets</a>, and therefore you might want to add XEC, VEE to truly represent the global equity markets.<br />
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We have a posting in progress that will look in general at 'funds of funds', a single ETF which holds a number of other ETFs. In that we will consider other international choices, such as iShares CBN.<br />
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The table just provides a snapshot (at time of writing) of some of the characteristics. You should consult the documents on companies you are considering purchasing. They are available here: <a href="https://www.blackrock.com/ca/individual/en/products/272108/ishares-core-sp-us-total-market-index-etf" target="_blank">XAW</a>, <a href="https://www.blackrock.com/ca/individual/en/products/251421/ishares-msci-eafe-imi-index-etf" target="_blank">XEF</a>, <a href="https://www.vanguardcanada.ca/individual/indv/en/product.html#/fundDetail/etf/portId=9555/assetCode=equity/?overview" target="_blank">VEF</a>, <a href="https://www.vanguardcanada.ca/individual/indv/en/product.html#/fundDetail/etf/portId=9548/assetCode=equity/?overview" target="_blank">VXC</a>.<br />
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As with any major investment decision, you should consult trusted advice before making your choice. Consider risk and reward, costs and tax implications in your ETF choice.<br />
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Here are links to ETFs mentioned in this posting:<br />
<ul>
<li><a href="https://www.blackrock.com/ca/individual/en/products/239447/?referrer=tickerSearch" target="_blank">CBN</a></li>
<li><a href="https://www.blackrock.com/ca/individual/en/products/239569/?referrer=tickerSearch" target="_blank">CIE</a></li>
<li><a href="https://www.blackrock.com/ca/individual/en/products/272108/ishares-core-sp-us-total-market-index-etf" target="_blank">XAW</a></li>
<li><a href="https://www.blackrock.com/ca/individual/en/products/251421/ishares-msci-eafe-imi-index-etf" target="_blank">XEF</a></li>
<li><a href="https://www.blackrock.com/ca/individual/en/products/239604/?referrer=tickerSearch" target="_blank">XMW</a></li>
<li><a href="https://www.vanguardcanada.ca/individual/indv/en/product.html#/fundDetail/etf/portId=9555/assetCode=equity/?overview" target="_blank">VEF</a></li>
<li><a href="https://www.vanguardcanada.ca/individual/indv/en/product.html#/fundDetail/etf/portId=9548/assetCode=equity/?overview" target="_blank">VXC</a></li>
</ul>
Have comments? As always, don't hesitate to leave them, or to connect with us on Twitter.<br />
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<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions. The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
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<i>Disclosure: The author of this column holds the following ETFs mentioned in this article in one or more account: XAW, VEF and VXC. I use Scotia iTRADE discount brokerage. No compensation by any company has been offered, requested or received for writing this column.</i></div>
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<br />Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-90008288686450381132017-05-10T08:54:00.004-07:002018-08-03T13:00:02.189-07:00US Equity ETFs for Canadians<div class="separator" style="clear: both; text-align: center;">
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A while ago we covered ETF options for <a href="http://fundsgarden.blogspot.ca/2017/03/some-canada-for-your-garden.html" target="_blank">Canadian equities</a> and <a href="http://fundsgarden.blogspot.ca/2017/03/can-we-talk-bonds.html" target="_blank">Canadian bonds</a>. In this post we look at choices in Canadian listed US stock index ETFs. A well diversified portfolio will have Canadian, US and International equities, along with bond and perhaps other offerings.<br />
<br />
<h3>
Why US Equities?</h3>
There are several reasons why every Canadian portfolio should hold at least one US equity ETF.<br />
The US stock markets represent by far the biggest single country component in global equity assets, <a href="http://stansberrychurchouse.com/china/by-this-measure-china-and-india-are-no-longer-emerging-markets/" target="_blank">a bit over 36% currently</a> according to a 2016 paper. The US equity markets are much better diversified than the Canadian equity market. If you believe in the school of holding stocks that dominate their markets, many of the world's dominant companies are listed on US equity exchanges.<br />
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<h3>
To Hedge or Not To Hedge</h3>
Many TSX listed US equity ETFs use currency hedging. <a href="http://canadiancouchpotato.com/2014/03/06/why-currency-hedging-doesnt-work-in-canada/" target="_blank">Canadian Couch Potato have provided a nice analysis</a> of the issue of whether currency hedging is a good idea or not. Based on analysts' research. they conclude that in the case of US equities hedged to Canadian dollars that hedging "<span style="background-color: white;">magnifies volatility rather than reducing it." We urge you to read the white papers linked in their posting, and examine commentary from experts in the last year or two, but overall it seems to us that there is no compelling case for hedging US equity ETFs to Canadian dollars. The market seems to support that view, with most twin products having somewhat larger holdings in the unhedged version.</span><br />
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<h3>
Go Big or Go Mostly Big</h3>
Another choice to make when selecting a passive US equity ETF is whether to select a fund based on the S&P 500 index of the largest companies, or a broader index that includes medium sized companies as well. Wondering which companies are listed on the S&P 500? There is <a href="https://en.wikipedia.org/wiki/List_of_S%26P_500_companies" target="_blank">a handy S&P 500 list of companies here</a>. I think there are arguments in both approaches - on the one hand the larger index might be argued to offer more complete diversification, while on the other hand a tiny percentage mainly of the largest companies have produced the vast majority of wealth generation over the long term. A really <a href="http://theirrelevantinvestor.com/2017/04/19/the-other-side/" target="_blank">nice analysis by Michael Batnick</a> shows that over the long term (last 15 years) only 8% of large cap US equities beat the index, only 5% of mid cap, and 7% of small cap. This, and other analysis, suggests that it is not so much the size of the equity, but other factors, that cause most equities to produce zero or negative returns. While within Canada I think the larger index makes sense since the TSX 60 is so concentrated on banks, in the US the S&P 500 is well diversified across industries.<br />
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<h3>
Good Choices</h3>
As was the case for Canadian bond and equity ETFs, we are in the fortunate position that there are multiple excellent choices in the US equity category, all with very modest costs. We suggest that you consider first the choices shown in the following table, but certainly other good choices exist.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhj1pOB2NftKUJs32ocKvRGFvktFaIcI2FfRMc-uXwerFrTlWggsH-UQqzT7J_ejX6bL2UobLkMeyK6qj6Kr9lstDfsJx8ActuAnv4DIbw7ZcooernVjgNXK-JNrtyuL6Vd0MTMRCKawak/s1600/USEqETF.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="262" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhj1pOB2NftKUJs32ocKvRGFvktFaIcI2FfRMc-uXwerFrTlWggsH-UQqzT7J_ejX6bL2UobLkMeyK6qj6Kr9lstDfsJx8ActuAnv4DIbw7ZcooernVjgNXK-JNrtyuL6Vd0MTMRCKawak/s400/USEqETF.png" width="400" /></a></div>
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As can be seen, all have large asset bases and reasonable MER, so any would be a good choice. If already invested in one, the slight differences probably do not justify the margin and commission costs of moving to another offering from the table. If making a first time purchase, I would probably consider VFV, which ties for the lowest MER, is not currency hedged, and has a large asset base.<br />
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HXS has one difference from the others that make it a good choice in certain situations. It is swap based, which means that it does not hold the actual equities, but rather a bank based promise note that is based on those equities. Dividends and distributions are built into the base price, but not paid directly. Therefore income is taxed as a capital gain, and is only triggered when the units are sold. Also, there is not foreign withholding tax on income. This makes HXS a good choice for some in unregistered accounts for those with variable incomes, and also in RESP and TFSA accounts. HXS is also included in the <a href="http://www.scotiabank.com/itrade/en/0,,4200,00.html" target="_blank">Scotia iTRADE commission free list</a>, which makes it a good choice for those purchasing in smaller amounts.<br />
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<h3>
Closing Thoughts</h3>
We covered only ETFs listed on the TSX in this post. Of course it is possible to hold US$ ETFs from the American markets within your discount brokerage. Generally the MER is slightly less on this option, and the trading volume is much larger so liquidity is excellent. Of course you need to take into account the currency exchange costs, and you will need to do an analysis to see which is a better choice for you.<br />
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Rob Carrick annually, as part of his ETF series, has a guide to US equity ETFs, with <a href="http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/etf-buyers-guide-part-3-us-equity-funds/article34640135/" target="_blank">the 2017 guide available to Globe readers here</a>. Also, morningstar.ca star ratings can be helpful as you make your choice. <a href="http://www.moneysense.ca/save/investing/best-us-etf-2017/" target="_blank">Moneysense have their 2017 review of US equity ETFs here</a>. They continue to see VUN as an excellent choice for most passive investors, and I would agree. While there is no doubt that the ETFs that concentrate on just the large companies will outperform in some market conditions, overall I see the broader VUN as a better choice, and one that should, in the long run, offer more consistent performance. <br />
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As mentioned earlier, I would make a choice centred on the S&P 500 and one which does not use currency hedging.<br />
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If your discount brokerage account is with Scotia iTRADE, and you are starting with modest amounts to invest, HXS is a good low cost choice with tax advantages when held outside a registered account. It is also a good choice held within a TFSA, since the foreign agreements that shelter income from foreign tax withholding in RRSP or RIF accounts do not apply to TFSA or RESP accounts.<br />
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I have not in this posting considered low volatility US equity ETFs, or international choices that include US equities. Both of those topics will be considered in future posts.<br />
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<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions. The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
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<i>Disclosure: The author of this column holds the following ETFs mentioned in this article in one or more account: HXS, VUN. No compensation by any company has been offered, requested or received for writing this column.</i></div>
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Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-6143102151716502017-05-09T08:29:00.002-07:002018-08-03T13:01:03.047-07:00Diversified Income XTR<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5lAlHWHYhvXg-0uEjHp5URUDZmU7vMIki4nfB_n324O845T2-r-9cEPPvpwWpOIQ1KaSQoYZYkfOTliZZh2bYOHAsIghv_AeJk8Ff0Jz_hqqXTOdFzSIfP7UWzBUhuC1sFg5JYYQkM0s/s1600/XTR.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="149" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5lAlHWHYhvXg-0uEjHp5URUDZmU7vMIki4nfB_n324O845T2-r-9cEPPvpwWpOIQ1KaSQoYZYkfOTliZZh2bYOHAsIghv_AeJk8Ff0Jz_hqqXTOdFzSIfP7UWzBUhuC1sFg5JYYQkM0s/s200/XTR.jpg" width="200" /></a>Income generation becomes a primary goal for your investment portfolio as you enter retirement. Most see bonds and dividend bearing stocks as the primary investment vehicles vehicles for income, although REITs, preferred shares and infrastructure can also play a role in a diversified income portfolio. <br />
<br />
While you can purchase a number of individual ETF products to assemble a diversified income portfolio, there can be advantages in a single fund. <a href="https://www.blackrock.com/ca/individual/en/products/239495/#/" target="_blank">XTR</a> from iShares is one such product, and we review it in this post.<br />
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<br />
<h3>
What Does XTR Hold?</h3>
iShares XTR is a 'fund of funds' meaning that it holds other iShares ETFs, in this case 11 funds. I list below in order of weighting the XTR portfolio (including my brief descriptor for each) as of May 2017:<br />
<ul>
<li>XHB (Canadian corporate bond) 20.5%</li>
<li>XHY (US corporate bond) 13.7%</li>
<li>CBO (Canadian 1-5 y corporate bond ladder) 12.0%</li>
<li>XEI (Canadian dividend equity) 11.7%</li>
<li>XRE (Canadian REIT) 8.7%</li>
<li>XDV (Canadian dividend) 8.0%</li>
<li>CUD (US dividend equity) 7.4%</li>
<li>CPD (Canadian preferred share) 5.3%</li>
<li>XUT (Canadian utilities) 5.2%</li>
<li>XST (Canadian staples equity) 4.5%</li>
<li>CLF (Canadian 1-5 y laddered government bond) 3.0%</li>
</ul>
You can get the details, including current portfolio weightings, of <a href="https://www.blackrock.com/ca/individual/en/products/239495/" target="_blank">XTR directly from iShares here</a>. To make the chart below I've lumped the funds into corporate bond, government bond, dividend equity, preferred share and REIT categories. While I have included XST with dividend equity, it is probably more properly viewed as a low volatility equity rather than strictly a dividend equity ETF.<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLQkUF0oz3UvMC1ujZBoiI7oKPFPgtza_R5-2s2STTIF__wm3aoHsCFMw2XHprW7kSZ2ii-1xLskcExfevI8LGnZ00u2IHBwjqb3G_uITRpc4VMN2WRJsRqNAlur-ylbhYHZ264Vg4_GM/s1600/PieXTRlegend.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="282" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLQkUF0oz3UvMC1ujZBoiI7oKPFPgtza_R5-2s2STTIF__wm3aoHsCFMw2XHprW7kSZ2ii-1xLskcExfevI8LGnZ00u2IHBwjqb3G_uITRpc4VMN2WRJsRqNAlur-ylbhYHZ264Vg4_GM/s400/PieXTRlegend.png" width="400" /></a></div>
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The overall holdings in XTR are 76.7% Canadian, 19.7% US, and about 3.7% from all other countries combined. This is good for tax benefits when XTR is held outside registered accounts, but not great in terms of <a href="http://fundsgarden.blogspot.ca/2017/02/diversification-dont-grow-only-tomatoes.html" target="_blank">diversification</a>.<br />
<br />
As a fund of funds, XTR is diversified over a lot of different underlying holdings, a bit over 2200 at the time of writing.<br />
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<h3>
Costs</h3>
The overall MER for XTR is now 0.60% (some sources still quote the audited 0.62% value), and that includes the fees inherent in the underlying funds that XTR holds. The current <a href="http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/rob-carricks-2017-etf-buyers-guide-best-dividend-funds/article34907818/" target="_blank">TER is 0.02%</a>, so trading within the fund does not add significantly to the overall costs. XTR is widely traded (typically 45 thousand units per trading day), so the spread between bid and ask is usually slight. While this MER may seem high compared to pure <a href="http://fundsgarden.blogspot.ca/2017/03/some-canada-for-your-garden.html" target="_blank">equity</a> or broad <a href="http://fundsgarden.blogspot.ca/2017/03/can-we-talk-bonds.html" target="_blank">bond ETFs</a>, it is competitive with fees associated with most dividend and blended funds.<br />
<br />
<h3>
Performance</h3>
The performance of XTR is steady but certainly far from spectacular. In the past year it has had a total return of 10.0%, but over 5 years the return averages 4.6% annually, while over 10 years it averages 5.3% annually. The majority of years show positive returns, with only one of the last 5 having a negative return (-5.98% in 2015).<br />
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With XTR you are giving up a little bit in return for regular income at modest variability.<br />
<br />
<h3>
Advantages</h3>
Especially if you have a relatively modest portfolio, the idea of holing a single product that effectively represents the various components of a well diversified income fund makes sense. You save commission costs of adding US and Canadian dividend ETFs, along with several corporate bond ETFs. <br />
<br />
XTR should be more stable than any one of these individual ETFs (e.g., the total yearly range of XTR over the past 12 months has just been 6% from minimum to maximum value), so it will help you reign in temptation to trade too often for your own good. <br />
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XTR pays out its distributions monthly, so it works well in a LIF or RIF where you are withdrawing funds monthly.<br />
<br />
While the performance has been less than a simple equity and bond couch potato portfolio, the mix of investment products may (but see below under concerns) help cushion some market volatility. As we move into retirement ages it is natural to worry more about the ups and downs of the market, so anything to reduce this variability is a positive.<br />
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If you don't immediately need the income, you can use DRIP to purchase additional units without commission costs.<br />
<br />
While we have too many ETFs in my opinion, I don't think we have enough ETFs that are single products well tailored to a need (such as retirement income, or couch potato type portfolios). XTR is a well designed income ETF, and that is why many tens of thousands of units trade daily on the TSX.<br />
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<h3>
Concerns</h3>
The bond holdings within the portfolio are not entirely investment grade. For example XHB (the largest single component of XTR) has essentially none of its portfolio in A, with 80.7% in BBB and the rest in lower investment grades (see the <a href="http://fundsgarden.blogspot.ca/2017/03/can-we-talk-bonds.html" target="_blank">explanation of bond ratings here</a>). That being said, XHB has been remarkably stable - e.g. it has not shown a negative return for any of the past 5 years. While they are not in the high investment ratings of government bonds, the companies XHB holds are mainly household names in Canada. The US corporate bonds held in the XHY ETF within XTR have a similar investment quality range.<br />
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Also, the bonds in XTR are mainly corporate, with only a few percent in investment grade government bonds. It is likely that in a major equity market correction these corporate bonds will not help cushion your portfolio the way that investment grade government bonds would.<br />
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Another potential concern is the high Canadian bias. About 76.7% of the portfolio is held in Canadian products, and only 3.7% are held outside Canada and the US. XTR has essentially no emerging market exposure, in bonds or equities.<br />
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A fourth potential concern is that there is little in the way of direct inflation protection in XTR, since it does not hold real return or TIP bonds. Also the REIT component is largely restricted to Canada.<br />
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Considering these potential concerns, if seeking the most stability in returns, it makes sense to pair XTR with some holding in products such as CBD or XAL that give you more government bonds, inflation protection, and wider international coverage. A future posting will consider these groupings quantitatively.<br />
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<h3>
Alternatives to XTR</h3>
Perhaps the closest alternative to XTR is <a href="https://www.bmo.com/gam/ca/advisor/products/etfs?fundUrl=%2FfundProfile%2FZMI!hash!holdings#fundUrl=%2FfundProfile%2FZMI%23holdings" target="_blank">BMO's ZMI</a>, which is also a 'fund of funds'. ZMI holds 17 other BMO funds, with the majority being a mix of Canadian and US dividend equity ETFs and corporate bond ETFs, with a little dose of REITs and other income ETFs. Compared to XTR, ZMI has slightly higher equity holdings and slightly lower bond exposure, but the differences are so small they hardly matter. The BMO ZMI includes some of the option linked products that BMO has made popular, including<br />
<br />
I slightly prefer XTR for the following reasons:<br />
<ol>
<li>Longer track record (XTR started in 2005 and ZMI in 2011), with good stability since the end of 2009 (the price did decline in 2015, but has recovered nicely).</li>
<li>More widely traded (on a typical trading day ZMI trades a few thousand units, while XTR several tens of thousands of units).</li>
<li>Better transparency (the 11 ETFs included in XTR are all easy to understand offerings, while ZMI include the covered call and put write holdings that many individual investors may not fully understand.</li>
<li>Although be careful comparing yields, I do like that XTR has given a very consistent approximately 6% yield (at current price) versus currently just over 4% for ZMI.</li>
</ol>
<div>
That being said, I would point out that if we compare 5 year annualized performances, ZMI has the edge at 5.70% vs 4.54% for XTR. There is also slightly more exposure outside North America in ZMI, an advantage in my opinion. The volatility of the two are very similar - according to Morningstar.ca the standard deviation for XTR is 4.8 while that of ZMI is 4.7. </div>
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<div>
If I was grading the two products my overall grade would be very nearly a tie. <a href="http://morningstar.ca/">Morningstar.ca</a> currently also gives the edge to XTR, with *** vs a ** rating for ZMI. Either ETF is a good choice. There are of course many other income generating mutual funds and ETFs, although most of them have at least somewhat higher MER than these products.<br />
<br />
Those seeking a mutual fund alternative should consider <a href="https://www.steadyhand.com/funds/income/" target="_blank">Steadyhand Income Fund</a>. The MER is slightly higher, but there are no commission charges. It is more conservatively invested than XTR, but returns have in the long run been marginally better (6.0% return per year averaged over the past 10 yr, although only 1.9% per year over the last 2 yr.) If you are <a href="https://www.steadyhand.com/accounts/" target="_blank">ready to invest at least $10,000, you can open a Steadyhand account directly</a>, or you can <a href="https://www.steadyhand.com/accounts/dealers/" target="_blank">buy Steadyhand Income Fund through most Canadian discount brokerages (SIF120)</a>.<br />
<br />
Another good income alternative would be <a href="https://www.tangerine.ca/en/investing/investment-funds/investment-fund/index.html" target="_blank">Tangerine Balanced Income</a> investment fund. Over 5 years it has offered a similar return 5.5% over 5 years, and has been pretty consistent from year to year. The portfolio is weighted to Canadian bonds, with about 10% in each of US and international equities. Its easy to set up an account with Tangerine, It does only pay out its distributions once accually (in December), so not as well suited as XTR to directly providing monthly income.</div>
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<h3>
Final Thoughts</h3>
<a href="https://www.blackrock.com/ca/individual/en/products/239495/#/" target="_blank">XTR</a> plays a major role in my personal retirement LIF, and I think XTR or ZMI make sense for many retirement accounts. I like that it combines in a single product the components that I want to play a major role in my income funds (bond and dividend funds in US and Canada, REITs), and that it pays a stable monthly distribution.<br />
<br />
In investing we should look forward not backward (a central message of the book <a href="http://fundsgarden.blogspot.ca/2017/02/the-3-simple-rules-of-investing.html" target="_blank">The 3 Simple Rules of Investing</a>). If I look backward at returns, I would probably concentrate in an equity and bond portfolio, but if looking forward I see more stability in a broader set of income generating holdings, and XTR fits very nicely into what I want to hold.<br />
<br />
That being said, I would not make it the only income product, although it may be the major one. I would consider an additional ETF that helps provide balance outside North America, as well as ideally more government bond exposure and some inflation protection (such as CBD or possibly XAL that I will cover in a future posts). <br />
<br />
Both XTR and ZMI provide a reliable income stream (currently about 5.7% for XTR and 4.0% for ZMI ) that is sufficient for many RIF retirement ratios, and that is paid monthly. You do give up potential return with these products compared to <a href="http://canadiancouchpotato.com/" target="_blank">simple stock plus bond portfolios</a> but in return you obtain slightly more stability across more asset classes.<br />
<br />
If considering holding these products outside a registered account, discuss tax implications with your financial advisor. <br />
<br />
<br />
<div>
<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for his or her own financial decisions. The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
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<i>Disclosure: The author of this column holds XTR (and has held ZMI, although not currently) and CBD. I also hold some SIF120. No compensation by any company has been offered, requested or received for writing this column.</i></div>
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<br />Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com1tag:blogger.com,1999:blog-7100356854525015128.post-38866109185803793632017-04-11T09:05:00.001-07:002018-08-03T12:25:22.658-07:00Review: The Four Pillars of Investing<a href="https://www.amazon.ca/gp/product/0071747052/ref=as_li_tl?ie=UTF8&camp=15121&creative=330641&creativeASIN=0071747052&linkCode=as2&tag=bayfunnet-20&linkId=e289abb0b146cdf95854f8b5b43e68f2" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKLUQIVZotb6MBiI5jycWGcLzIfZjblTLfz9rde_F4uUCdXNwve8LrryVhPxq13n1PnMuyu5P_arY_RuUyd7w0BCN68v5kxegxdZlhXr5_UzBNQrlUx1VlTN69PES-dvamcIANWWY5v90/s200/FourPillarsCoverR.png" width="126" /></a>I would strongly recommend anyone serious about investments start their education with this book. I first read <a href="https://www.amazon.ca/gp/product/0071747052/ref=as_li_tl?ie=UTF8&camp=15121&creative=330641&creativeASIN=0071747052&linkCode=as2&tag=bayfunnet-20&linkId=e289abb0b146cdf95854f8b5b43e68f2" target="_blank">The Four Pillars of Investing</a> (McGraw Hill, 2010) by Dr. William J. Bernstein a few years ago. I reread it recently in preparation for this review. Like any good book, new insights and appreciation emerged on rereading.<br />
<br />
<h3>
The Structure of the Book</h3>
The author uses an architecture metaphor, asking what pillars should underpin your investment portfolio. His four pillars are:<br />
<ol>
<li>Theory of Investing</li>
<li>History of Investing</li>
<li>Psychology of Investing</li>
<li>Business of Investing</li>
</ol>
I was hesitant to even list these pillars in the review, as they make the book sound heavy and boring. But it is not that at all! Rather, it is one of the most interesting investing books I have read!<br />
<br />
Each of the themes is covered in a number of chapters. For example, Chapter 3 "The Market is Smarter Than You Are", is his take on the efficient market hypothesis. As well as providing the statistics to show that most funds will be, on average, well, approximately average, he makes the strong case that you can't pick stocks and you can't time the market successfully in the long term.<br />
<br />
I particularly liked the historical depth of the book, not just in the second section but throughout. He starts off the history section with the statement: "About once every generation, the markets go barking mad." I loved the many historical tidbits I learned, such as that Isaac Newton had big investment losses in the South Sea Bubble, or about the early 'stock exchange' in the coffeehouses of Change Ally. While these examples may be considered trivia, the historical aspects of the book help us place boom and bust, risk and reward, within a long equity history.<br />
<br />
The above is not the only clever opening statement. The psychology section starts "The biggest obstacle to your investment success is staring out at you from your mirror." In chapters 7 and 8 he offers insight on investment emotions, and practical advice on how to reign in investor behaviour issues. It is full of gems like<br />
<blockquote class="tr_bq">
"...asset classes with the highest future returns tend to be the ones that are currently the most unpopular."</blockquote>
In answer to the question "To whom do I listen?", Dr. Bernstein offers the same advice of many others to tune out the investment noise. He then goes on to summarize with remarkable simplicity and clarity the two aspects that you may well need guidance with.<br />
<ul>
<li>Your appropriate asset allocation</li>
<li>Being self-disciplined in your investments</li>
</ul>
<div>
While the majority of the book is concerned with establishing the four pillars, closing chapters deal with putting it all together (his so-called investment "assembly instruction booklet'). While the specific advice must be placed within the context of the time that the book was revised, now almost 8 years ago, the general theme of using low cost passive index investments, appropriately diversified across different asset classes, remains as true today as when the book was written.</div>
<div>
<br /></div>
<h3>
Why I Liked It</h3>
I find that too much investment writing tries to jump to just the answers - without first establishing a base to critically evaluate any proposals. This book fills that void. <br />
<br />
The book will help you see investments within a long term historical trend, quantitatively establishes the importance of asset allocation, and helps you avoid paying too much for financial services and reign in your own worst tendencies.<br />
<br />
The writing style is clear, engaging and, dare I say fun? The historical tidbits, and statements of principles through analogy and metaphor, make the book feel light, while teaching you some critical investment truths. He wrote the book with that aim – to appeal to an audience that did not embrace mathematics.<br />
<br />
In<a href="http://fundsgarden.blogspot.ca/2017/04/review-portfolio-first-aid.html" target="_blank"> an earlier review of a different book</a>, I mentioned that after reading a book I ask myself the following four questions.<br />
<ol>
<li>Was my time invested in the book, time well spent?</li>
<li> Do I have confidence in the validity and balance in the presentation? </li>
<li>Was I engaged in the book? </li>
<li>What were the author's motives in writing the book? </li>
</ol>
<div>
I enthusiastically answer YES to the first three questions. While any author hopes to have some financial success with a book, I feel that Dr. Bernstein, first and foremost, wants to help individual investors have success and avoid blunders.</div>
<br />
<h3>
The Author's Other Books</h3>
The author has been prolific in his investment writing, and you may well be interested in some of his other books. Prior to this book, William Bernstein wrote <a href="https://www.amazon.ca/Intelligent-Asset-Allocator-Portfolio-Maximize/dp/0071362363/ref=sr_1_3?s=books&ie=UTF8&qid=1491925130&sr=1-3" target="_blank">The Intelligent Asset Allocator</a>, a more mathematically based book than this one. I have not yet read it personally, but plan to. It has received high praise from readers.<br />
<br />
More recently (published in 2012) his <a href="https://www.amazon.ca/Investors-Manifesto-Prosperity-Armageddon-Everything/dp/1118073762/ref=sr_1_2?s=books&ie=UTF8&qid=1491925130&sr=1-2" target="_blank">The Investor's Manifesto</a> covers some of the same theoretical underpinnings as The Four Pillars of Investing. It is richer in mathematical basis, and of course more up to date in the current index investing landscape. I hope to give it a full review in the not too distant future.<br />
<br />
You can get a full list of his investing books on his website, <a href="http://www.efficientfrontier.com/">http://www.efficientfrontier.com</a>, including his Investing for Adults series which I have not read.<br />
<br />
In case you were wondering about his background, <a href="https://en.wikipedia.org/wiki/William_J._Bernstein" target="_blank">William Bernstein</a> followed work in science into a career as a medical neurologist. He lives in Portland, Oregon, and for a number of years his efforts are invested in financial theory and history, and investment writing. The <a href="http://www.theglobeandmail.com/report-on-business/rob-magazine/invest-like-a-legend-william-bernstein/article33736135/" target="_blank">Globe and Mail did a nice interview with him that is available here</a>.<br />
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<h3>
Concluding Thoughts</h3>
If you are just getting started in investing, this book is the perfect place to start. It will help you think about the big picture before you start considering advice for specific investment instruments. The book is interesting to read, and provides a solid grounding. It's not surprising that it has a large number of positive reviews on Amazon and similar sites. <br />
<br />
Especially for Canadian investors, this is not a DIY manual though. After reading the book you will need to go to other information sources (dare we say including <a href="http://fundsgarden.blogspot.ca/" target="_blank">our website</a>?) for help in putting together a specific intelligent portfolio for your investment situation.<br />
<br />
If picking up the book used, make sure you get the 2010 edition, and not the 2002 edition. Both are still available on Amazon. The 2010 version has a red bar across the top of the cover.<br />
<br />
If you use an eReader, the <a href="https://www.amazon.ca/gp/product/0071747052/ref=as_li_tl?ie=UTF8&camp=15121&creative=330641&creativeASIN=0071747052&linkCode=as2&tag=bayfunnet-20&linkId=e289abb0b146cdf95854f8b5b43e68f2" target="_blank">book is available in both Kindle and printed form</a>. The ebook is also available on <a href="http://www.yourcloudlibrary.com/index.php/en-us/" target="_blank">CloudLibrary</a>, should you have an account through your local public library.<br />
<br />
I have no hesitation in placing this book in the top few investment books you should read! Enjoy! As one of the reviews on Amazon commented:<br />
<blockquote class="tr_bq">
"<span style="background-color: white; color: #111111; font-family: "arial" , sans-serif; font-size: 13px;">What sets this book apart from other investing books is the breadth of areas covered, and also the writing style which is both "understandable and entertaining". A highly recommended read for any investor regardless of level."</span></blockquote>
I agree. Whether starting out in investing, or if you have been an involved investor for many years, or even if you are a professional financial advisor, you will find real value in this book.<br />
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<div>
<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions. The writer is not a professional financial planner or investment advisor. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
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<i>Disclosure: No compensation by any company, organization or individual has been offered, requested or received for writing this column. We do however belong to affiliate programs for some of the links that you find in our articles, details available upon request.</i><br />
<i><br /></i><i>Books for Review: I will not promise a positive, or even any, review, but if you wish to submit your investment book for me to consider, contact me rhawkes (at) chignecto.ca. I am particularly interested in Canadian books.</i></div>
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<br />Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-53393057338319790892017-04-09T08:55:00.000-07:002018-08-03T12:33:26.450-07:00Do XAW, VXC Represent Global Stock Market ?<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVtAmoGkvHCEVv1QvzJXqW1ACM8uSbKvVs6C2UnAmzIYetnTOaUmP1pxfoQCRcbcyD6St9aYyq_lVCid-7JpShlM7K2arjy53LlS8RJJ7Ig4N9OQnV6QUXJI2BDmzwwHlqE2ThyunPnFQ/s1600/globe-1339833__340.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVtAmoGkvHCEVv1QvzJXqW1ACM8uSbKvVs6C2UnAmzIYetnTOaUmP1pxfoQCRcbcyD6St9aYyq_lVCid-7JpShlM7K2arjy53LlS8RJJ7Ig4N9OQnV6QUXJI2BDmzwwHlqE2ThyunPnFQ/s200/globe-1339833__340.png" width="200" /></a>Do you know what proportion of the global stock assets are represented by US markets? those in Canada? Europe? China? A surprising number of investors have either vague or out of date answers. This post will provide some data on the global equity space, along with reflections on how that might inform your investing choices.<br />
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While most investors exercise some degree of home country bias, for a variety of good reasons, it makes sense to invest globally. In this posting I propose a simple idea: why not invest in different markets according to the size of those markets? <br />
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Some Data</h3>
The size of economies is somewhat different from the size of equity markets in those countries, and it is a good question whether we should use stock market or economy size. I will work with stock market valuations in this post. <br />
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There are about 60 stock markets globally, and their valuations are shown in a <a href="http://www.visualcapitalist.com/all-of-the-worlds-stock-exchanges-by-size/" target="_blank">really nice data visualization here</a>. You can get the <a href="http://www.world-exchanges.org/home/index.php/statistics/annual-statistics" target="_blank">raw data with the most recent statistics here from the World Federation of Exchanges</a>.<br />
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Kim Iskyan wrote an article for Asia Wealth Investing Daily in November, 2016 that provides statistics (taken from Bloomberg) on the sizes and growths of different national stock markets, with a look at the top ten. You can <a href="http://stansberrychurchouse.com/china/by-this-measure-china-and-india-are-no-longer-emerging-markets/" target="_blank">read his report here</a> courtesy of <a href="http://stansberrychurchouse.com/" target="_blank">Stansberry Churchouse Research</a>. <br />
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Not surprisingly the US stock market is the largest by a significant factor, at 36.3% of the total. China was second, at 10.1%, followed by Japan at 7.9%, Hong Kong at 6.3% and UK at 4.6%. Canada, followed by France, Germany, India and Switzerland complete the top ten.<br />
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If we accept the premise of investing globally in proportion to equity assets, about 36% of your equity investments should be in the US, 10% in China (with another 6.5% in Hong Kong), 8% in Japan, about 3% in Canada.<br />
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The World It Is A Changing</h3>
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The <a href="http://stansberrychurchouse.com/china/by-this-measure-china-and-india-are-no-longer-emerging-markets/" target="_blank">article cited earlier</a> points out that a fairly dramatic change in the relative capitalizations of different markets is taking place. For example, from October 2003 to 2016, the US stock market while increasing in an absolute sense, dropped as a fraction of global stock assets from 45.2% to 36.3%. The big increases were all in Asia, with China going from 1.5% in 2003 to 10.1% in 2016, Hong Kong from 3.0% to 6.3%, and India from 0.8% to 2.6%. Stock markets in Europe and Japan all fell as a global percentage. Interestingly the Canadian market, with a slight rise from 2.6% to 2.9%, was the only top 10 'developed' market to show an increase.<br />
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Do XAW and VXC Represent World?</h3>
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So how would you build an ETF portfolio consisting only of TSX listed ETFs that faithfully represented the entire global equity market. While specialized ETFs representing almost any market now exist, and you could build an ETF portfolio to almost exactly represent the world's equity markets, the MER would be high for so the many specialized products. <br />
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Most use ETF products like <a href="https://www.blackrock.com/ca/individual/en/products/272108/?referrer=tickerSearch" target="_blank">XAW from iShares</a> or <a href="https://www.vanguardcanada.ca/individual/mvc/detail/etf/overview?portId=9548##overview" target="_blank">VXC from Vanguard Canada</a> to represent most of the world. These track different indices, with <a href="http://fundsgarden.blogspot.ca/2017/04/developed-or-emerging-classification.html" target="_blank">XAW tracking the MSCI </a>while <a href="http://fundsgarden.blogspot.ca/2017/04/developed-or-emerging-classification.html" target="_blank">VXC tracks the FTSE global index</a>.<br />
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Both <a href="https://www.blackrock.com/ca/individual/en/products/272108/?referrer=tickerSearch" target="_blank">XAW</a> and <a href="https://www.vanguardcanada.ca/individual/mvc/detail/etf/overview?portId=9548##overview" target="_blank">VXC</a> have excess weight on the US equity market, with XAW at about 54% and VXC at almost 56%, whereas the actual size of the equity markets suggest that only about 36% should be in US equities. Both under represent emerging markets, with a total emerging market share of 11.5% in XAW and 7.8% in VXC currently. Note that VXC does not include any Canadian equity at all, so you should include at least 3% of your investments in a broad Canadian ETF such as <a href="https://www.vanguardcanada.ca/individual/mvc/detail/etf/overview?portId=9561##overview" target="_blank">VCN</a> or <a href="https://www.blackrock.com/ca/individual/en/products/239837/?referrer=tickerSearch" target="_blank">XIC</a>.</div>
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A simple way to make your global equity ETFs more representative of the entire world is to include about 20% of your holdings in <a href="https://www.blackrock.com/ca/individual/en/products/251423/?referrer=tickerSearch" target="_blank">XEC</a> or <a href="https://www.vanguardcanada.ca/individual/mvc/detail/etf/overview?portId=9556##overview" target="_blank">VEE</a> emerging market ETF (even though there are emerging holdings already in the XAW and VXC). This would reduce the US holdings to about 44%, neareer to the 36.1% of the global equity assets, and similarly for other developed markets.<br />
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Another option would be to make up your global holdings using <a href="https://www.vanguardcanada.ca/individual/indv/en/product.html#/fundDetail/etf/portId=9555/assetCode=EQUITY/?overview" target="_blank">VEF</a> (developed markets except the US, but including Canada), <a href="https://www.vanguardcanada.ca/individual/indv/en/product.html#/fundDetail/etf/portId=9557/assetCode=EQUITY/?overview" target="_blank">VUN</a> (or some other widely represented US holdings) and <a href="https://www.blackrock.com/ca/individual/en/products/251423/?referrer=tickerSearch" target="_blank">XEC</a> (or <a href="https://www.vanguardcanada.ca/individual/indv/en/product.html#/fundDetail/etf/portId=9556/assetCode=EQUITY/?overview" target="_blank">VEE</a>) for the emerging markets component. In this way you can adjust your US, other developed and emerging market holdings to the exact amounts you desire. If Scotia iTRADE is your discount broker, VEF and XEC are both <a href="http://www.scotiabank.com/itrade/en/0,,4200,00.html" target="_blank">commission free </a>to buy and sell, making this option even more attractive. If you want to include China as a separate component, <a href="https://www.bmo.com/gam/ca/advisor/products/etfs?fundUrl=%2FfundProfile%2FZCH#fundUrl=%2FfundProfile%2FZCH" target="_blank">ZCH</a> could be used, although remember you do have China represented in <a href="https://www.blackrock.com/ca/individual/en/products/251423/?referrer=tickerSearch" target="_blank">XEC</a> or <a href="https://www.vanguardcanada.ca/individual/mvc/detail/etf/overview?portId=9556##overview" target="_blank">VEE</a>. Also, the number of individual stocks within ZCH is limited. If you want to add some Canadian home market bias (see below), <a href="https://www.blackrock.com/ca/individual/en/products/239837/?referrer=tickerSearch" target="_blank">XIC</a> or <a href="https://www.vanguardcanada.ca/individual/mvc/detail/etf/overview?portId=9561##overview" target="_blank">VCN</a> (or many others) could be added.<br />
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But I Want to Minimize Risk!</h3>
While it is natural to look backwards, as the excellent book <a href="http://fundsgarden.blogspot.ca/2017/02/the-3-simple-rules-of-investing.html" target="_blank">The 3 Simple Rules if Investing</a> reminds us: only look forward. It is true that volatility has in the past been greater in emerging markets. However, with high developed market equity valuations, unusually low interest rates, and political uncertainty in several developed economies, it can legitimately be asked whether the more governmentally controlled 'emerging' economies such as China may offer lower future volatility.<br />
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Just as passive investors are urged to own all (or really a major part) of a domestic market, it could be argued that the same principle would argue to hold most of the world equity assets proportionately in a global equity portfolio. </div>
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Why Home Bias?</h3>
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I'm sure they have been written, but I can't recall reading an investment commentary on the virtue, or lack thereof, of home bias. This is a topic for a future column, but I considered reasons that you would want to show some home bias in your investments.</div>
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<li>Your income needs are related to the inflation rate in your home economy, so significant Canadian holdings make sense.</li>
<li>As we argued in a post about holding individual stocks, it makes sense to invest in what you best understand, and that for most is the Canadian market.</li>
<li>While government intervention is only one of many factors, it does influence the rewards and risks of different types of investments. You will understand the political climate of your own country best.</li>
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Only you can decide what amount of home bias you want to have in your investments. It probably makes sense to have less home bias in your accumulation phase than in retirement when you are withdrawing regularly from your funds.<br />
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Concluding Thoughts</h3>
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Of course there are good reasons to not weight investments only according to the relative size of that countries equity assets. For example, risk will vary in different countries. Also, average valuations, as expressed by P/E or other measures, may be significantly different in different regions. Also, we know the North American stock market much better, and that familiarity might help us make better choices.<br />
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You should expect more than a rule of thumb about what fraction to be held in Canada, US and internationally based on the situation of ten years ago. Make sure that your financial advisor discusses international holdings, and in particular emerging economies, in a current, evidence based fashion. If you do decide to have extra North American assets, make sure that it is a deliberate choice. <br />
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The international ETF space continues to change, so make sure to investigate the holdings of each ETF with current data before you make any decisions. We will be reviewing emerging market ETFs in a future post.<br />
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<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions. The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
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<i>Disclosure: The author of this column holds the following ETFs mentioned in this article in one or more account I manage: XEC, XIC, VCN, VEF and VXC. I use Scotia iTRADE discount brokerage services. No compensation by any company has been offered, requested or received for writing this column.</i></div>
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Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com1tag:blogger.com,1999:blog-7100356854525015128.post-59387029358681569522017-04-07T10:27:00.002-07:002018-08-03T13:05:47.445-07:00Developed or Emerging: Classification Systems<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhiucrGTK-TFx2otjBeCTNmKKqoll4kp872Qw4MUlGD76FOfbht4JsdvhzlJp1zzxHunTNt1fgwDsux0qODJJOLKx9LaX2aauQzXpLFMgWXqEY-9664iKrJYOkigsuCm-8ibnFciR0SccA/s1600/world-map-Pixabay-146505_960_720.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="101" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhiucrGTK-TFx2otjBeCTNmKKqoll4kp872Qw4MUlGD76FOfbht4JsdvhzlJp1zzxHunTNt1fgwDsux0qODJJOLKx9LaX2aauQzXpLFMgWXqEY-9664iKrJYOkigsuCm-8ibnFciR0SccA/s200/world-map-Pixabay-146505_960_720.png" width="200" /></a>Before we can consider in detail the question of how much should be invested in different international markets, and how, it is necessary to be clear on what we mean by terms like emerging and developed. Markets are classified by the major index companies. As an investor it is important to know what index your passive ETF or index mutual fund follows, and which countries are, and are not, included in that index.<br />
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MSCI Classification</h3>
MSCI (Morgan Stanley Capital International) provides one of the major classification systems used in the index investing world. They divide equity markets into <i>Developed</i>, <i>Developing</i> and <i>Frontier</i> divisions (there is also a <i>Standalone</i> market index. with national exchanges not included in any of the previous three; this mainly includes very small or very isolated exchanges). You can <a href="https://www.msci.com/market-classification" target="_blank">see the details of which country is in which classification here</a>.<br />
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<h3>
FTSE Classification</h3>
The other primary classification system is provided by FTSE (now part of the combined FTSE-Russell). FTSE stands for Financial Times Stock Exchange. They divide markets into <i>Developed</i>, <i>Advanced Emerging</i>, <i>Secondary Emerging</i> and <i>Frontier</i>. You can <a href="http://www.ftse.com/products/downloads/Matrix-of-Markets_latest.pdf" target="_blank">see current country inclusion in the categories of the FTSE here</a>. Of particular utility is their <a href="http://www.ftse.com/products/downloads/Matrix-of-Markets_latest.pdf" target="_blank">Matrix of Markets</a> that lists stock markets by country against index segments. This is a simple way to see if a particular country is in an index based ETF.<br />
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<h3>
Things Change</h3>
The indexes are periodically reconsidered - for example FTSE update their list usually in March of each year. The process of deciding if countries should be moved to another category is complex. Metrics are established for that process, looking at aspects such as transparency, accountability, liquidity and size of the market. <a href="http://www.ftserussell.com/sites/default/files/research/ftse_country_classification_process_final.pdf" target="_blank">FTSE-Russell explain their process in a white paper available here</a>. In the MSCI classification Pakistan will move from <i>Frontier</i> to <i>Emerging</i> in May 2017.<br />
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<h3>
Should We Be Doing This?</h3>
Many have commented that the term emerging economy is obsolete and should be abandoned. Certainly <a href="http://stansberrychurchouse.com/china/by-this-measure-china-and-india-are-no-longer-emerging-markets/" target="_blank">markets like China and India are rapidly growing</a> and are similar in many ways to the markets in the developed category. While <a href="https://www.thebalance.com/what-are-emerging-markets-3305927" target="_blank">five characteristics are claimed to represent emerging economies and markets</a>, application of these descriptors is difficult.<br />
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Also, there is a problem with any category system in that two stock markets with only slight differences might result in inclusion in different indexes. For example, why are Poland and the Czech Republic included in developing, yet those economies are similar in life style, economy and political environment to neighbouring European countries that are in the developed category? There appear to be similar discrepancies in Asia.<br />
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But we do need some way to lump together economies and stock markets that share similar characteristics. One option might be to assign a grade to each stock market on a scale (say 0 to 100) based on how developed it is. Then we could have indexes that track only markets with a score in a certain range. While the result might be almost identical to the current system, there would be better transparency of results.<br />
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Final Thoughts</h3>
The Vanguard ETFs follow the FTSE index, while generally speaking the iShares ETFs follow MSCI. Vanguard have <a href="https://www.vanguardcanada.ca/documents/ftse_hardcard.pdf" target="_blank">a really nice listing that links ETF products against the index they follow</a> all on one page.<br />
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While the country inclusion is pretty similar in the MSCI and the FTSE, there are differences. For example, FTSE place South Africa in developed, while MSCI do not. The Chinese stock market is divided into A and B categories, historically on the basis of whether foreigners were allowed to invest on that market. How the A Chinese stock markets are handled affects international index funds.<br />
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In a future posting I will I discuss the fraction of global equity assets in different markets, and the implications on how we should invest globally.<br />
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<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions. The writer is not a professional financial planner or investment advisor. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
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<i>Disclosure: No compensation by any company, organization or individual has been offered, requested or received for writing this column.</i><br />
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<br />Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-6090111629923539442017-04-03T10:46:00.000-07:002018-08-03T13:06:44.932-07:00Review: Portfolio First Aid<a href="https://www.amazon.ca/gp/product/0470836474/ref=as_li_tl?ie=UTF8&camp=15121&creative=330641&creativeASIN=0470836474&linkCode=as2&tag=bayfunnet-20&linkId=9b8122311ade34749670bca714cac7a6" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;" target="_blank"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWSgH1m4LaIoGdHMF_qgdTb4HKS0OABr9lhhTp7vVYdEqWyxrdDIesog6zTSftH44whflLnGvk_k2QAjqfTrfoX_MX0GrLVmVhKO5BCTwzfTSVLx4VjUmuAmUw4LGlbb5mxDBSOca3JZs/s200/PortfolioFirstAid2005cover.png" width="136" /></a>I picked up a copy of <a href="https://www.amazon.ca/gp/product/0470836474/ref=as_li_tl?ie=UTF8&camp=15121&creative=330641&creativeASIN=0470836474&linkCode=as2&tag=bayfunnet-20&linkId=9b8122311ade34749670bca714cac7a6" target="_blank">Portfolio First Aid</a> at my local public library, intrigued by the title and impressed by the author team. Micahael Graham, PhD (Economics) was Chairman of the Board at Toronto investment firm Heathbridge Capital Management Ltd. at the time the book was published (2005), and had worked in investment industry for more than 40 years. He currently runs <a href="http://www.michaelgrahamis.com/" target="_blank">MGIS</a>. Co-author <a href="http://ca.rbcwealthmanagement.com/bryan.snelson" target="_blank">Bryan Snelson</a> is a Vice-President and Investment Advisor at RBC Wealth Management.<br />
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What I Liked</h3>
Any investment book is only as good as the quality of the advice it offers. Given the expertise of the authors, one can have confidence in this book. An investment book also needs to be clear and engaging, and I would give this book high marks in both.<br />
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The writing is clear and precise. I liked the use of boxes to draw attention to important points. The titles of these. In both these boxes and in sections titles effectively draw the reader in. By current standards the 2005 book is somewhat lacking in illustrative material, but the black and white visuals and tables explain key ideas effectively.<br />
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Perhaps it will not appeal to all readers, but I like how we come to know the authors through commentary throughout the book. For example, on pg. 8 Michael relates the experience of flying to Winnipeg on Oct. 19, 1987, Black Monday, for a pre-planned meeting with investors. What do you say the day after markets have lost 23% in one day?<br />
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I particularly liked <i>Chapter 7 Show Me The Money: Investing for Income.</i> You will find coverage of dividends, real return and corporate bonds, laddered bonds, income trusts, dividend funds, preferred shares and much more.<br />
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After I finish reading a nonfiction book I always ask myself these four questions. One is, was my time invested in the book, time well spent? Do I have confidence in the validity and balance in the presentation? Was I engaged in the book? What were the author's motives in writing the book? To the first three I could confidently answer YES for this book.<br />
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With respect to the last question, I suppose any author team always have mixed motivations for a book, but I do feel that in the case of this book there is an authentic desire to contribute to the well being of investors. The authors write in the preface<br />
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"There is nothing worse than having to inform an investor that his or her hard-earned savings has been badly mauled-sometimes irreparably"</blockquote>
They feel that with careful analysis and attention to a portfolio the odds of that can be lowered, while retaining reasonable returns.<br />
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Not That Book</h3>
One of the online reviews of the 2009 version of this book, a very negative review, complains that the book has little specific advice to offer, and emphasizes use of professional advisors more than it should. While I feel that the reviewer has been unfairly harsh, it's true that <i>Chapter 4 You Need Financial Help! </i>and <i>Chapter 5 It's Always About You: Working With Your Advisor </i>assume that the correct choice for most is to work with a financial advisor, rather than DIY investing. Perhaps because of this assumption, as the negative reviewer noted, little in the book that is detailed enough to guide the DIY investor in specific decisions.<br />
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I view this book as contributing to understanding the big picture of investing. A recipe book for do it yourself investors it is not. Discount brokerage accounts are mentioned on only four different pages in the 2005 book, and not as a recurring theme. Exchange traded funds (ETFs) find mention on only five different pages in the book.<br />
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That is not to say the book does not get involved. <i>Chapter 9 Running With Scissors: Prescriptions for Managing Risk</i>, for example, covers bond ratings, market risk, interest rate risk, default risk, lost-opportunity risk, purchasing power risk, stop-loss orders, options, calls, short-selling, puts, hedge funds and covered calls. They urge individual investors to avoid many of these financial instruments, however.<br />
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Concluding Thoughts</h3>
I liked this book and recommend it to Canadian investors for inclusion in a list of your first 10 investment books. I should point out that I reviewed the 2005 book, but an updated book on the same theme, by these authors plus Cindy David, CFP. You can <a href="https://www.amazon.ca/gp/product/0470738529/ref=as_li_tl?ie=UTF8&camp=15121&creative=330641&creativeASIN=0470738529&linkCode=as2&tag=bayfunnet-20&linkId=dcfc86c0c5660f212f73ddb9d92f17e9" target="_blank">get the 2009 book at Amazon.ca</a> in printed or kindle formats. You can <a href="https://www.amazon.ca/gp/product/0470836474/ref=as_li_tl?ie=UTF8&camp=15121&creative=330641&creativeASIN=0470836474&linkCode=as2&tag=bayfunnet-20&linkId=9b8122311ade34749670bca714cac7a6" target="_blank">pick up the 2005 edition from Amazon.ca</a> and independent booksellers and you can probably find it at low cost from used bookstores, or free from a public library.<br />
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While no on can predict the future, there are many worrisome signs about the investing landscape these days. It's a perfect time to consider how you can guard against the catastrophic losses, and this book will help.<br />
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Toronto based freelance financial journalist Jade Hemeon wrote the following in his review of the 2005 book on Amazon.ca.<br />
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<span style="background-color: white; color: #333333; font-family: "arial" , sans-serif; font-size: x-small;">"A useful and entertaining tour of the investment world that hits all the significant ports of call. Written by two veteran financial advisors in a vividly descriptive fashion, it offers sage advice enhanced by personal anecdotes and humor. This book will help investors avoid costly mistakes and develop a strategy that can withstand the drama of shifting market moods."</span></blockquote>
I could not say it better! Give this book a read, and you will come away with a deeper understanding of the investment world. But don't expect the book to be a step by step guide to DIY investing, or you will be disappointed.<br />
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<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions. The writer is not a professional financial planner or investment advisor. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
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<i>Disclosure: No compensation by any company, organization or individual has been offered, requested or received for writing this column. We do however belong to affiliate programs for some of the links that you find in our articles, details available upon request.</i><br />
<i><br /></i><i>Books for Review: I will not promise a positive, or even any, review, but if you wish to submit your investment book for me to consider, contact me rhawkes (at) chignecto.ca. I am particularly interested in Canadian books.</i></div>
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Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-3551219047939389002017-04-02T09:46:00.001-07:002018-08-03T13:08:49.257-07:00Your Plan Starts With Goals<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9hBCVSV14qm5RV17LaFtS5Zo8BOEsWs2i-vRhTtGxRpGRLqiB8aFGONx53-xkdUhZZluio-hx79X37cYdwZU9tAyxu0a_m4wbNp3xDYo8gfnCwm91E0TshKM7UBsB1VhLFlBaQO7NrzY/s1600/Plan_Pixabay-593333_960_720.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="191" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9hBCVSV14qm5RV17LaFtS5Zo8BOEsWs2i-vRhTtGxRpGRLqiB8aFGONx53-xkdUhZZluio-hx79X37cYdwZU9tAyxu0a_m4wbNp3xDYo8gfnCwm91E0TshKM7UBsB1VhLFlBaQO7NrzY/s200/Plan_Pixabay-593333_960_720.jpg" width="200" /></a>Financial planning experts agree that having a plan is essential, and that it is important to periodically revisit that plan. As with many things in life, it is never too late to start with a financial plan. My main point in this short post is that your plan should not start money, but rather with your life goals. It works best if your plan is in writing.<br />
<br />
<h3>
Life Goals</h3>
Start with the big picture. Each plan will be unique, since each of us is unique, but the following questions may be helpful.<br />
<br />
<ul>
<li>Who are the most important people in your life?</li>
<li>What in life is most important to you?</li>
<li>Who else are you, or might you be, responsible for, and what are their needs?</li>
<li>What organizations and causes do you want to support?</li>
<li>What are your career aspirations, and what do you need to get there?</li>
<li>What age do you hope to retire, and do you see retirement as a partial or full retirement from paid work?</li>
<li>What makes you happy?</li>
<li>What special needs to do you have?</li>
</ul>
<br />
<h3>
Getting There</h3>
<div>
After you have your life goals established, the next step is to make a reasonable series of financial estimates of what you will need to achieve your goal. For example, if you want to fully retire at a certain age, make reasonable estimates of how much you anticipate needing. Keep in mind that OAS and CPP will get you part way there. Then use a calculator such as <a href="http://www.financialpost.com/personal-finance/calculators/investment/index.html" target="_blank">this one from Financial Post</a> to estimate how much you need to contribute each year to meet your goal. </div>
<div>
<br /></div>
<div>
Other goals will be easier to estimate. For example, perhaps you want enough for a down payment on a house of a certain price in five years time, or want to build up an emergency fund to cover 9 months of expenses.</div>
<div>
<br /></div>
<div>
Some may be more complex - for example you want to be able to quit your job and start up a business. You need a reasonable business plan not just for startup funds, and income replacement, but also to anticipate possible business losses in early years and a contingency fund.<br />
<br /></div>
<div>
<h3>
Not Just One Plan</h3>
I think that having multiple parallel plans works best for many of us. For example, have one retirement plan, another that is a plan for education savings, a plan to work toward a major housing goal, a plan for helping causes important to you, etc. Clearly the different plans must make sense when taken together with your resources, but it is often simpler to establish the way forward when we view it as a series of parallel paths. Also, I think it is more encouraging to see that progress has been made in meeting some goals, even when we have fallen short on others. <br />
<br />
Some argue that multiple plans add complexity, but I think the opposite is true. It is simpler to look at our financial goals and progress as a series of parts, and then view the big picture as the sum of those parts.<br />
<br /></div>
<h3>
Rebalance Your Life Plan</h3>
Just as we are advised to rebalance investments annually, you should revisit the life goal aspects of your plan periodically. Evaluate whether your goals or circumstances have changed, and make changes to your plan. One advantage of your plan being in writing, even if as simple as a bullet list of items, is that it makes it easy to see whether you are on track, and where changes are needed. I have never done this personally, but I know of people who set a date, like New Year's, for a formal reconsideration each year, and I think that makes a lot of sense.<br />
<br />
<h3>
Know When To Hold and When To Fold</h3>
While plans are important, they can and should be changed. As the <a href="http://www.lyricsfreak.com/k/kenny+rogers/the+gambler_20077886.html" target="_blank">Kenny Rogers The Gambler</a> lyrics suggested<br />
<blockquote class="tr_bq">
<span style="color: #474747; font-family: "times new roman" , serif; font-size: 15px;">"You've got to know when to hold 'em</span> </blockquote>
<blockquote class="tr_bq">
<span style="color: #474747; font-family: "times new roman" , serif; font-size: 15px;">Know when to fold 'em"</span></blockquote>
I think that some of us don't know when to hold them, when to stay firm to goals, even when things seem difficult. But some of us are also too resistant to change goals, even when, deep down, we know we should.<br />
<br />
Maybe something that was important to you, is no longer so important. Perhaps you have new priorities. Maybe you have changed your mind and want to retire earlier or later. Sometimes conditions require us to change our plans - for example after the market crashes some had to postpone retirement, or make it a partial retirement.<br />
<br />
<h3>
Resources for Developing a Financial Plan</h3>
<div>
I don't personally like the financial priority and order in some of these processes, but the following are valuable background for developing your financial plan.</div>
<div>
<ol>
<li><a href="http://www.wikihow.com/Write-a-Personal-Financial-Plan" target="_blank">WikiHow have a clear and attractive article on developing a financial plan</a>. I particularly like their emphasis on SMART. Is it Specific, Measurable, Achievable, Rewarding and Timely</li>
<li>The M<a href="http://www.moneysense.ca/save/financial-planning/the-moneysense-complete-financial-plan-kit/" target="_blank">oneysense Financial Plan Kit</a> is surely one of the most complete guides out there, and well thought out. They provide a series of Word of PDF documents to help you create a plan in 11 steps.</li>
<li>Although not as prescriptive as the above, the <a href="http://www.finiki.org/wiki/Creating_a_financial_plan" target="_blank">finiki document on Creating a Financial Plan</a> is Canadian with good information on a number of aspects of your plan.</li>
<li>Want to see what an award winning financial plan looks like? See this <a href="http://www.theglobeandmail.com/globe-investor/personal-finance/article25867361.ece/BINARY/Finalist+Financial+Plan+-+Competitor+AME1505.pdf" target="_blank">great Canadian financial plan here</a>.</li>
</ol>
</div>
<h3>
</h3>
<h3>
Closing Thoughts</h3>
Life is not about investments. Investments are tools, nothing more (or less). They are tools that allow you to care for others, to provide educational opportunities, to feel secure in your retirement, to allow independence, to support organizations and causes important to you. <br />
<br />
Whether you want to engage a professional financial planner to assist you with the plan is a matter of personal preference. If you are making the plan yourself, make sure that you use valid sources to help you with quantitative aspects of your plan.<br />
<br />
For many it makes sense to start the life plan goals on your own, but then get a professional financial planner to help estimate how much you will need, and how to get there financially. You can <a href="http://www.fpsc.ca/find-a-planner-certificant" target="_blank">find a CFP® (Certified Financial Planner) in your area here</a>. I would not count on an advisor who has a stake in your investments to help you with a financial plan.<br />
<br />
If you do use the services of a professional planner, always keep in mind that it is <i>your </i>plan and you must take ultimate responsibility for your plan. She or he may help you develop the plan, but never ask (or let) an advisor to make the plan for you.<br />
<br />
This posting has considered developing a life plan, and a little bit about the financial needs for that plan. After that part of your plan is complete, you also need an investment plan, that will guide how to invest your savings consistent with your life plan. We will cover investment plans in a future post.<br />
<br />
Happy planning!<br />
<br />
<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions. The writer is not a professional financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. For major financial decisions it is always wise to consult skilled, impartial professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i><br />
<br />
<br />
<br />
<br />Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-30740113980482647202017-04-01T07:54:00.001-07:002018-08-03T13:09:51.628-07:00You Need a PFA!<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVQajjVPa-RspG6PGwNUzVMhgA4uFEknfmqvW_SSHak6MwCLflmO6_3C37r-LuiRPc0IAfMCFTS-f3IMnM_Ttlhm1aO0BTBTopAZUeocg3Ii0z0h3Iod_KRU0fv9MEkKp7saMFPjDP4tw/s1600/FoodBldgApr1Pixabay.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="150" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVQajjVPa-RspG6PGwNUzVMhgA4uFEknfmqvW_SSHak6MwCLflmO6_3C37r-LuiRPc0IAfMCFTS-f3IMnM_Ttlhm1aO0BTBTopAZUeocg3Ii0z0h3Iod_KRU0fv9MEkKp7saMFPjDP4tw/s200/FoodBldgApr1Pixabay.jpg" width="200" /></a>A new food store opened in our neighbourhood. I decided to check it out a number of months ago. As I walked through the doors of the modern palace, sunlight streamed through the windows. It certainly looked nice.<br />
<br />
I started toward the first aisle, but was greeted by a very young man in a crisp dark business suit.<br />
<br />
"Hello, and welcome to JBFE. Come into my office and we will discuss your food needs" he said, offering me a too firm handshake and a smile.<br />
<br />
"I just came to sort of browse the store...." I mumbled.<br />
<br />
With self-assured confidence he smoothly declared "I am Mr. Stuart Foodee, PFA, WKWE and I will be your Personal Food Advisor. Now if you just step into my office, I will help you decide which of our foods are best for you."<br />
<br />
I tried a few more objections. but soon I was sitting in his office, the other side of a glass desk, my eyes fixed on a painting of a carrot on the wall, right next to his PFA certificate. I noted that the date on it was five days ago.<br />
<br />
Mr. Foodee smoothly continued... "First, you need to fill out some surveys before we can design your personal food plan and portfolio."<br />
<br />
"My food portfolio? But I just wanted to look around today" I protested.<br />
<br />
"Food is very important, literally a matter of life and death. You can't just rush in and buy things. You need a personal food advisor to help you make good choices. Food is complex, there are literally hundreds of thousands of choices. We at Elite Foods want to help you navigate those choices, and I am your Personal Food Advisor. Now let's get started, Bobby."<br />
<br />
No one had called me Bobby since I was six.<br />
<br />
"Now, how many meals a day do you usually eat, Bobby?"<br />
<br />
"Uh... 3 I guess" I answered. "Very interesting" he commented.<br />
<br />
The list of questions continued....<br />
<br />
"Would you rate your food knowledge as novice, intermediate, expert or advanced?" I admitted I was novice.<br />
<br />
"Do you prefer environmentally sensitive food choices?" I thought I should say yes.<br />
<br />
"What is your monthly salary from all sources?"<br />
<br />
I looked at him quizzically and protested "But I just want to maybe buy a few items here."<br />
<br />
Mr Foodee did not skip a beat, "We can't help you make good food choices unless you are open with us, Bobby. Look around, you can trust us, we are professionals."<br />
<br />
"Now we need to evaluate your food risk." he continued.<br />
<br />
"Oh, like how concerned I am about pesticide residues?" I said, for the first time seeing some potential value in this conversation.<br />
<br />
"No" my PFA replied "Let me get at your food risk through these questions. Would you rather have fine delicacies on the first two weeks of the month, if it meant you had to eat less later in the month?"<br />
<br />
I mumbled some reply, and he gave me a food risk tolerance score of 71.<br />
<br />
Eventually the interview process was over, and Mr. Foodee declared that he was finished. The printer buzzed and he printed out some forms, but I was not allowed to see them.<br />
<br />
With relief I turned to finally explore the store, but he firmly blocked the way. "You don't need to enter the store, in fact we can't let people do that, I mean you need us to decide what your food needs are. Food is complex."<br />
<br />
"If you just sign these three forms, everything will be set up. Oh and we need your credit card and SIN for our records."<br />
<br />
"Maybe I will come back, I'm not sure about this." I protested.<br />
<br />
"Billy, we are professionals. I am your Personal Food Advisor. We offer hundreds of highly differentiated mutual food services here."<br />
<br />
Eventually I signed the forms, and was given some pamphlets on thick glossy card stock. I left, not sure what had just happened.<br />
<br />
A week later a courier arrived at my apartment, with a tiny food basket in crisp white lining. I admit, it did seem exciting. The custom labels looked nice, although the products really did not seem a good fit for what I liked to eat, at least the ones that I understood. <br />
<br />
Also, when I looked at the receipt I was shocked by how expensive everything was. Plus I was charged 3% more for management fees, plus a front end food fee, I guess for the analysis of my needs by my PFA. There was also a fee because apparently my account was a small one. And a few other fees.<br />
<br />
I went in the next month to cancel the food service, but somehow I got persuaded to instead meet with a Vice President Client Services. Wow, a VP seeing me on my second visit, they did really care about me! I admit, it all seemed very professional. <br />
<br />
The Vice-President had me do another survey, or maybe it was the same survey over again,and gave me more glossy brochures, and I signed something else. I mean who was I to know about my food needs and all the choices? I mean food is complex, you know.<br />
<br />
Still, a month later, after seeing how much more expensive food was than at my old store, I went in, determined to cancel the service this time. I discovered that I had a DSC. I had never heard of those before, but I guess they are standard in the food portfolio business. It turns out that if I cancel in less than 7 years I need to pay 6% of my annual food costs to cancel the service. Food service is complex.<br />
<br />
Oh well, those baskets are pretty nice. And I did get to meet another Vice-President! They seem to have a lot of vice-presidents.<br />
<br />
I pretty much just have enough money each month to cover my apartment and the food service, but really that simplifies my life. No need to choose where to go or what to buy any more. I can't believe that I used to manage without a Personal Food Advisor. I mean food is complex! It is calming to have my PFA make all the decisions.<br />
<br />
I realize you may have questions, but please ask Mr. Foodee, my PFA. I lately, have had trouble thinking for myself. Not sure when that started, a few months ago, I think. <br />
<br />
I went to the library the other day to see if I could get a self-help book, but when I asked at the desk for a personal library assistant to select the book that was best for me and sign it out for me, they just sort of looked puzzled and referred me to the reference desk. I went home without any book, feeling a little sad, but not sure why.<br />
<br />
<i>This posting should not be considered professional food advice.</i><br />
<br />
<br />
<br />Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-90164024098451545762017-03-29T07:10:00.002-07:002018-08-03T13:11:53.454-07:00Review: Inflation-Proof Your Portfolio<a href="https://www.amazon.ca/gp/product/1118249275/ref=as_li_tl?ie=UTF8&camp=15121&creative=330641&creativeASIN=1118249275&linkCode=as2&tag=bayfunnet-20&linkId=b0a83e87d93c8839babbc0d6717bdeab" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;" target="_blank"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi5g2_LzXy5supSNTOUd2UynDnPrEm40n-o1UXS_Pkwfg1uVvNIWbRjf5pmhji0hPlfIbFP7VCsuEiJlyZ9kJXpCFq6VOxAcS5AhPtY4Y8-21dxIZlw48a2V_ZBxKqKq4iuonXw4lazQS8/s200/InflationProofCover.png" width="139" /></a>After so many year's of extremely low interest rates and low inflation, too many have been lulled into complacency that will always be the case. When browsing investing books last month I came across <i><a href="https://www.amazon.ca/gp/product/1118249275/ref=as_li_tl?ie=UTF8&camp=15121&creative=330641&creativeASIN=1118249275&linkCode=as2&tag=bayfunnet-20&linkId=b0a83e87d93c8839babbc0d6717bdeab" target="_blank">Inflation-Proof Your Portfolio</a></i> by David Voda. I have recently finished the eBook version available through my local public library (it is also available as a hard back printed book). Here are my thoughts on the book.<br />
<br />
<h3>
The Main Messages</h3>
The key ideas of the book can be simply summarized:<br />
<ul>
<li>Government debt is growing at an alarming rate (the book is written from a USA perspective, but the argument would hold for many countries including Canada).</li>
<li>It is argued that hyperinflation will result (not everyone agrees with this, and <a href="https://www.forbes.com/sites/jeffreydorfman/2015/02/17/18-trillion-reasons-why-interest-rates-will-stay-low/#7e3852197e54" target="_blank">Jeffrey Dorfman argues that the high debt will keep interest rates low</a>, the exact opposite of premise in this book). </li>
<li>To help protect against hyperinflation 'exchange dollars for real things.'</li>
<li>Under hyperinflation remember that a dollar in the future is worth far less than a dollar now.</li>
<li>Since not all countries will simultaneously suffer inflation at the same time and rate, diversify across a number of currencies.</li>
<li>The final principle expressed in the book is 'prepare for the worst, but expect the best.'</li>
</ul>
Most experts would agree with some of the advice in the book, such as lock in your mortgage rate at a long term, low fixed rate. Some of the other advice, such as to buy gold and silver coins, mining companies, real estate, and other commodities, is less universally supported by financial writers.<br />
<br />
<h3>
The Good</h3>
It is right that we should be wary of increases in inflation and interest rates, and no reader could leave the book without concern about government debt. <br />
<br />
The ideas of diversifying across currencies, holding more of your assets in 'real things', and think about the consequences of rapidly rising interest rates all ring true to me.<br />
<br />
There is some good general financial advice (although it is often lost within the political hyperbole of the book).<br />
<br />
Each chapter ends with a Key Points section. I wish all financial books used this structure.<br />
<br />
The eBook version has live web links to a large number of cited sources in each chapter. This makes it easy to check out statements. The quality of referenced material varies somewhat, from reports to articles of various depth.<br />
<br />
<h3>
The Bad</h3>
I found David Voda's writing style too alarmist and political in tone for my liking. <br />
<br />
That is unfortunate, since, as indicated above, there are positives in the book. We should all be concerned about rising government and personal debt, particularly when that rise is high compared to the GDP change. There is a case for holding a portion of our portfolio in "real" assets to guard against inflation losses, and for some to consider investing outside the stock and bond market in real assets.<br />
<br />
The main problem with the book is that despite the title, there is not much directly related to inflation proofing an investment portfolio in the book. Many opportunities to talk about the type of ETFs that are likely to hold up under inflation are missed. In fairness, the book does not claim to be investment advice.<br />
<blockquote class="tr_bq">
"This book is neither an economic treatise nor specific investment advice."</blockquote>
I wish there had been more depth on actual inflation proofing portfolio ideas, and less political views and coverage of what I consider to be solutions that would appeal to only a few. Interestingly, the author is not a fan of TIPs and other inflation protected bonds, an obvious topic.<br />
<br />
The most current edition of the book was published in 2012 by Wiley, and a more up to date treatment of some of the topics might have added to authenticity.<br />
<br />
By wandering into areas that, in my humble opinion at least, have little relationship to the topic of the book (such as protecting your Facebook privacy and preparing to live off the grid if society breaks down), the focus of the book is lost.<br />
<br />
<h3>
So Who Wrote This?</h3>
I did not consider who had written the book until after I finished reading the book. Interestingly, their is no author biography on Amazon, unusual particularly for a book published by a major publisher like Wiley. It does show other books by the author, including a couple on snowboarding, one on real estate, and a recent book on debt and financial planning. A bit of digging did find this <a href="http://ca.wiley.com/WileyCDA/WileyTitle/productCd-1118249275.html" target="_blank">biography on the Wiley site</a> for the book.<br />
<blockquote class="tr_bq">
"<b style="color: #1d2626; font-family: Lato, sans-serif; font-size: 14px;">DAVID VODA</b><span style="background-color: white; color: #1d2626; font-family: "lato" , sans-serif; font-size: 14px;"> is a writer, businessman, and investor currently living in Boulder, Colorado. He has written on business topics for the </span><i style="color: #1d2626; font-family: Lato, sans-serif; font-size: 14px;">Los Angeles Times</i><span style="background-color: white; color: #1d2626; font-family: "lato" , sans-serif; font-size: 14px;"> and the </span><i style="color: #1d2626; font-family: Lato, sans-serif; font-size: 14px;">New York</i><span style="background-color: white; color: #1d2626; font-family: "lato" , sans-serif; font-size: 14px;"> </span><i style="color: #1d2626; font-family: Lato, sans-serif; font-size: 14px;">Times,</i><span style="background-color: white; color: #1d2626; font-family: "lato" , sans-serif; font-size: 14px;"> was a realtor in Palm Springs, California, and buys and sells real estate for his own account. He was a principal in Yes Yes Productions, which produced the award-winning feature, </span><i style="color: #1d2626; font-family: Lato, sans-serif; font-size: 14px;">The Secretary</i><span style="background-color: white; color: #1d2626; font-family: "lato" , sans-serif; font-size: 14px;">. Most recently, he was producer of PJTV's business and economics show, </span><i style="color: #1d2626; font-family: Lato, sans-serif; font-size: 14px;">Front Page."</i></blockquote>
Some of the best investing books have been written by people with varied professional backgrounds, so I would not hold that against the author. It is not obvious to me how widely read this book is. I was surprised that Amazon.ca had zero reviews of it. It states that this second edition, published by Wiley, came after a wildly popular self-published first edition.<br />
<br />
<h3>
Final Thoughts</h3>
Early in the book, after a rant in favour of non-interventionist governments, the author writes "But enough about politics." Unfortunately, he did not follow his own advice in the rest of the book. This book should have had a title like "One Individual's Concern About Government Debt and Inflation."<br />
<br />
Overall, I would certainly not place this book in the top 10 (or even the top 25) investment books that you should read. So, if you are just starting out in investing, don't start with this book!<br />
<br />
But if looking to explore public finance and interest and inflation rate issues, <a href="https://www.amazon.ca/gp/product/1118249275/ref=as_li_tl?ie=UTF8&camp=15121&creative=330641&creativeASIN=1118249275&linkCode=as2&tag=bayfunnet-20&linkId=b0a83e87d93c8839babbc0d6717bdeab" target="_blank">Inflation Proof Your Portfolio</a> may be worth a quick read (it actually does not take long to go through the entire book). Check if you can get the book at your local library. But read with a critical eye.<br />
<br />
<div>
<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions. The writer is not a professional financial planner or investment advisor. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
<div>
<i><br /></i></div>
<div>
<i>Disclosure: No compensation by any company, organization or individual has been offered, requested or received for writing this column.</i><br />
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<i>Books for Review: I will not promise a positive, or even any, review, but if you wish to submit your investment book for me to consider, contact me rhawkes (at) chignecto.ca. I am particularly interested in Canadian books.</i></div>
<br />Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-57826608651405062312017-03-11T09:56:00.000-08:002018-08-03T13:20:51.517-07:00Can We Talk Bonds?<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJ6VMJbMbPdnVrzDWh7VtIPjPHc5OZb5wryfW6pkJk7VF0zEk1Cnpq3Y5HDeMq5YKxelHmH2c2DgedzgGWQHRJ0jLnrRfZrdbtpuUUnrYch8TJ86iecH-lsaYrp4kSoW_bxv8RWaoTG0I/s1600/AA.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJ6VMJbMbPdnVrzDWh7VtIPjPHc5OZb5wryfW6pkJk7VF0zEk1Cnpq3Y5HDeMq5YKxelHmH2c2DgedzgGWQHRJ0jLnrRfZrdbtpuUUnrYch8TJ86iecH-lsaYrp4kSoW_bxv8RWaoTG0I/s200/AA.png" width="156" /></a>Now that you have some<a href="http://fundsgarden.blogspot.ca/2017/03/some-canada-for-your-garden.html" target="_blank"> Canadian equity ETF</a> planted in your investment garden, the next step is to add some bonds. Bonds serve as a <a href="http://www.theglobeandmail.com/globe-investor/retirement/retire-taxes-and-portfolios/bond-etfs-work-as-a-buffer-against-market-volatility/article34052259/" target="_blank">buffer against volatility</a>, since high quality bonds usually go up in value when equity prices go down (and vice versa). We will start by describing how individual bonds work, although for most of us a bond ETF makes more sense.<br />
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Introduction to Bonds</h3>
Those of retirement age probably bought Canada Savings Bonds in the past. You buy a bond with some money, at some point in the future they give you back that money, along with interest along the way. Bonds work like that. Unless the government or company defaults, your <i>principal</i> (the initial cost) is guaranteed and is returned on the <i>maturity date</i>. The interest rate is called the <i>coupon</i> in the world of bonds.<br />
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Bonds are sold by the Canadian government, the provinces, municipalities, and companies. We call bonds from companies <i>corporate bonds</i>, while the others are called <i>government bonds</i> (sometimes municipal are split off into their own category). Compared to stocks (equities), most individual bonds are safer, both from absolute loss of principal, and also from deep losses in value. <br />
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Bond Ratings</h3>
That is not to say that buying a bond is absolutely safe. The investing world have developed ratings for bonds as a measure of how secure they are. The most widely used bond rating system is done by Standard & Poor. The most secure bonds, generally offered by national governments, are given a rating of AAA. Still very secure, but slightly less so, are AA and then A, followed by BBB. We show these in the following table. Different terms are sometimes used for the different letter categories, but there is general agreement that BBB and above are investment grade. Note that Moodys have a slightly different bond rating system.<br />
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I don't like the term <i>"junk" bonds</i> for those rated BB and below. I think that has a more negative connotation than is appropriate. Yes, there is a higher risk than with government AAA or AA bonds, but junk bonds these are often offered by large stable companies and the odds of them not defaulting are good. The reason to purchase bonds in the BBB to B rating is that generally they pay a significantly higher coupon rate in return for the higher risk that you are assuming.<br />
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Many discount brokerage firms allow you to purchase individual bonds and hold them in your account. I am most familiar with Scotia iTRADE. They make it easy to find bond listings according to the type (e.g. corporate), duration, coupon rate and credit quality. In terms of pricing you pay a commission at purchase of $1 per $1000 in face value, but with a minimum of $24.99 (and a maximum of $250). For example if you buy bonds worth $20,000 you will pay $20 in commissions, while if you buy $100.000 you will pay $24.99. Of course these may well change, so be sure and check current rates if you are considering purchase of individual bonds.<br />
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I have never purchased an individual bond from my discount brokerage. It seems to me that the commission is significant, especially if I consider that I would want to buy a number of different bonds to lessen the impact if one of them did default. I think unless you are a huge institutional investor it is better to buy a bond ETF.<br />
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Bond ETF Choices</h3>
The Freedom Thirty-Five blog has done a really nice job of <a href="http://www.freedomthirtyfiveblog.com/2017/01/ultimate-bond-etf-guide-vab-xbb-zcm.html" target="_blank">looking at Canadian bond ETF choices</a>. As he points out, while cost is important, so is performance. By the way, while on his site, check out his graphic in About Me regarding what others think he does! He points out that there are more than 60 bond ETFs on the TSX, so my analysis below will be highly selective, looking only at broad holdings of primarily investment grade bonds. We will look at corporate bonds in a future post.<br />
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You can purchase bond ETFs with exclusively corporate or government bonds, with long or short durations, or a ladder of purchase dates. You can purchase bonds that will increase in value if interest rates go up (so called real return bonds in Canada, TIPs in US). But in the rest of this column, I am going to narrow the choice to three widely held bond ETFs with reasonable MER values and which hold a mix of government and corporate bonds, mainly of investment quality.<br />
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My three choices are shown in the following table. For each I give the name, fees expressed as a MER, the assets held in the fund (e.g. 385M$ means that $385 million dollars are invested in XQB at the time of writing), the average daily volume at the current time (e.g. 65k means about 65000 units of VAB are traded daily), and the spread between bid and ask prices on open orders. Note that all of these change over time, so if important to you should be checked through a source such as <a href="http://morningstar.ca/">morningstar.ca</a> at the time of investment.<br />
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Note that although ZAG has a formal MER of 0.23 based on audited financial statements, its MER currently and going forward will be 0.10. We explain all that <a href="http://fundsgarden.blogspot.ca/2017/02/when-is-mer-not-what-you-think-it-is.html">here.</a><br />
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I did some searching, both directly from the companies themselves and from third party assessments, and the portfolio holdings reported for the same product seemed slightly inconsistent. I expect this is due to how bonds with a federal agency that is a crown corporation are reported (is that corporate or government?), and the changes from different reporting periods. In any case, all three hold a mix of government and corporate, with roughly 60 to 70% government and 40 to 30% corporate.<br />
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While any of these are good choices, there are some differences. As indicated in the table, the effective durations are not quite the same, with XQB slightly shorter duration. ZAG is a fund of funds, which means that rather than holding a number of individual bonds, as VAB and XQB do, it <a href="https://www.bmo.com/gam/ca/advisor/products/etfs?fundUrl=%2FfundProfile%2FZAG%23holdings#fundUrl=%2FfundProfile%2FZAG%23holdings" target="_blank">holds in varying amounts 10 other BMO bond funds</a>. In this way it is arguably more fully diversified than the other two. While all three are high investment quality, XQB contains nothing below A, while VAB does have just under 10% at BBB. This helps the investment yield, at only a tiny amount of higher risk.<br />
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If you are a <a href="http://www.scotiabank.com/itrade" target="_blank">Scotia iTRADE</a> account holder, there is an advantage of XQB in that it is on the list of commission free trades. This means that it is a good choice if you are purchasing your bond ETF in a number of small transactions, which would not be efficient if you needed to pay commissions with each purchase. It is also helpful for annual strategic rebalance, since there is not a commission charged for XQB sale or redemption in an iTRADE account.<br />
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There are other broad Canadian ETFs not covered here. iShares XBB has more than $2.3 billion in assets, and has been a mainstay for many years, but with its MER of 0.34% I find it currently uncompetitive. If you desire a swap-based product that does not pay out annual dividends, then HBB (MER of 0.17%) is worthy of consideration. Many suggest that in the current climate you give up a little bit of return and buy shorter duration ETFs to guard agains interest rate fluctuations. Vanguard VSB would be a good choice (MER 0.11%) as would iShares XSB (although at a higher MER of 0.25%).<br />
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Final Thoughts</h3>
My final views? If your discount brokerage is something other than Scotia iTRADE, I would probably choose ZAG. I like the stability of the "fund of funds" approach, it has a marginally higher yield, and a marginally lower management fee going forward. The Canadian Couch Potato have currently selected it for bond holdings. The differences are not enough to move ETFs if already invested in one of the others, however. If you are a Scotia iTRADE customer, I would use XQB. You will more than make up for the slightly higher MER through saved commission fees.<br />
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As with any financial decision, it is always wise to seek qualified investment counsel prior to purchase. The 2017 edition of the <a href="http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/rob-carricks-2017-etf-buyers-guide-best-bond-funds/article34416202/" target="_blank">Globe and Mail Buyer's Guide to Bond ETFs</a> by Rob Carrick is now out, and is a valuable and comprehensive source of information for Canadian bond ETFs.<br />
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The fees are now remarkably low for bond ETFs. With XQB a Scotia iTrade customer can hold $10000 in bonds, spread across high quality federal, provincial and corporate bonds, and pay only $13 a year in fees, and no commission charges for purchase or redemption.<br />
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<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions. The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
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<i>Disclosure: The author of this column holds the following ETFs mentioned in this article in one or more account: VAB and XQB. I use Scotia iTRADE discount brokerage services. No compensation by any company has been offered, requested or received for writing this column.</i><br />
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<i>Corrections and Additions: I added the link to the 2017 Guide to Bond ETFs which was not out at the time of the original article. Following the original posting, I divided this into sections for clarity.</i></div>
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<br />Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-88589560588968053512017-03-04T11:05:00.002-08:002017-03-04T11:05:59.941-08:00Some Canada For Your GardenIt's about time we got down to some specifics in terms of what investments to consider for your funds garden. We will start with Canadian equity (stocks). using ETFs as our investment vehicle.<br />
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It is generally agreed that Canadian stocks should be a core component of a Canadian portfolio. For most individual investors, rather than holding those stocks directly, it makes sense to use an ETF. <br />
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Another option would be Canadian stock index mutual funds, but that will result in a higher MER. If you don't want to bother with a discount brokerage account, mutual funds might still be a good option for you. Also, if you are funding your investments in small amounts at a time, mutual funds will avoid the discount brokerage commissions on ETF purchases. We will cover Canadian stock index mutual funds in a future post.<br />
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Fortunately, there are a number of great Canadian stock ETFs with very low management expense ratios (<a href="http://fundsgarden.blogspot.ca/2017/02/mer-management-expense-ratio.html" target="_blank">MER</a>). At the time we are writing this (early March 2017) the information on the most popular choices in this category are given in the following table (click on it to make the image easier to read).</div>
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The <a href="https://www.tsx.com/" target="_blank">Toronto Stock Exchange (TSX)</a> actually has two branches. the main TSX which with 1561 companies listed, and a venture category for smaller and newer companies, that as of the time of writing, had 2424 listed companies. You might be surprised by these numbers, since most financial news talks about either the <a href="https://en.wikipedia.org/wiki/S%26P/TSX_Composite_Index" target="_blank">TSX composite</a>, that contains about 250 of the larger companies from the entire TSX, or the <a href="https://en.wikipedia.org/wiki/S%26P/TSX_60" target="_blank">TSX 60</a> which, as the name implies, is the 60 largest companies. As companies grow, or reduce in net worth, the exact companies on the two lists change slightly from time to time.</div>
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Is it better to hold an ETF that tracks the TSX 60 or the TSX composite? The advantage of the TSX 60 is that they are all large, for the most part very stable and well established, companies. This is very much a 'blue chip' list, and most of the companies are household names. It is important to realize that the TSX, and especially the TSX 60, is far from diversified, however. For example, at the current time the three largest companies are all banks (Royal, Toronto Dominion and Bank of Nova Scotia), and together they account for almost 24% of the entire TSX 60 value! Even in the broader TSX composite, these three companies represent nearly 18% of the index value.</div>
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The main Canadian stock ETFs track either the TSX 60 index or the TSX composite index. From the ETFs shown in the table, VCN, XIC and ZCN track the composite index (or a slight alteration of it), while HXT, VCE and XIU track the TSX 60. As you can see, competition in this investing space has resulted in very low and similar MER of 0.06 on most products (XIU being the exception).</div>
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If MER is not a distinguishing characteristic, how do you choose between the ETF options? The simple answer is that the products are very similar, will yield nearly the same performance, and really you should not worry too much about which to choose. </div>
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There is one significant difference between HXT and the other offerings in the table, however. All of the others hold the actual TSX stocks. That is, they take the funds invested in the ETF, and then buy proportionately the different stocks in the index. The down side of this is that when the index changes, the fund will need to do a bit of buying and selling, triggering some capital gains, and for short periods of time drifting very slightly from the index. The plus side, though, is that you really are owning the actual stocks by holding the ETF. </div>
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The HXT product is an example of what is called a swap-based ETF. Rather than buying the stocks, it gives the money to a bank that agrees to return to HXT the return of the TSX index over the period of time. The process is well <a href="http://canadiancouchpotato.com/2011/06/06/understanding-swap-based-etfs/" target="_blank">explained in this post from the Canadian Couch Potato </a>site (note the MERs have changed in the several years since that post was written, but the explanation of how the swap works is still valid). </div>
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There is an important tax (and income) difference that should be understood as you make the choice between HXT and one of the other Canadian index ETFs. No dividends are paid by HXT, although they are worked into the appropriate changing price of the ETF. This means that swap based products are not good choices when you want a regular income stream. There is a potential tax advantage, though, in that you do not need to pay annual tax on dividends earned. It is important to realize that you will still be taxed, but as a capital gain when you sell your units of HXT. What you are really doing is deferring the tax, and it will appear as a later capital gain rather than as a regular annual dividend. Whether this is a positive or negative will depend on your personal financial situation. Swap based products are good if your income from other sources is variable, and you can cash in the HXT units in a tax year when your other income is relatively low.</div>
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For any ETF, a consideration is how widely traded the product is. We have shown (using data from <a href="http://morningstar.ca/">morningstar.ca</a>) the mean daily volume of each ETF. For example, the mean number of units of HXT that traded in a day were 212000 (we have written this as as 212k, with k meaning thousands, in the table). We also show the total assets held in each of the ETFs - e.g. ZCN has about 2.4 billion dollars invested in the fund. Both of these numbers will change over time, so you should check for current values if this information is important to you. These are all pretty widely held, however, and the concerns about specialized ETFs that are only lightly traded do not hold for any of these products.<br />
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I have also included in the table (using <a href="http://morningstar.ca/">morningstar.ca</a> data) the spread between the mean ask price at which the ETF is offered for sale, and the price being bid by someone looking to purchase the ETF. A smaller spread is desired, since that implies it will be easier to quickly buy or sell the ETF without paying a premium on the transaction. Naturally widely held ETFs with high daily trading volume are generally expected to have a lower spread. The figures here represent a snapshot at the time I am writing this post, and would change from day to day according to overall trading volume and other factors. By showing patience and using limit orders you can usually get a stock or ETF at a fair price.</div>
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Some of these products have been around much longer than others - e.g. iShares XIU entered the Canadian ETF space earlier, as one of the first Canadian ETFs, and that largely accounts for the fact it has much more money in assets.</div>
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If you use Scotia iTRADE as your discount brokerage, HXT can be <a href="http://www.scotiabank.com/itrade/en/0,,4200,00.html" target="_blank">bought and sold without commission</a>. I believe that QTrade Investor and Virtual Brokers also offer HXT without commission, but check with them to be sure.<br />
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Personally I prefer the slightly broader holdings of the composite index. Within that space I see little difference between VCE, XIC and ZCN - I personally use XIC, but that is mainly because I was invested in XIC units before the other two started operation. I do like for some accounts (e.g. my TFSA) the swap based HXT. Also if I am investing in small amounts. I use HXT since it is commission free in my Scotia iTRADE account.<br />
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There are a number of other ETFs that operate in the Canadian equity index space, and we may cover some of them in future posts. For most investors, however, we feel that one or more of the options shown in the table would well serve your needs.<br />
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You should discuss with your investment advisor which of these products are best for you, and have her/him explain in more detail the implications of swap-based vs. directly held ETFs. Your investment advisor can also help you determine how much of your portfolio to hold in Canadian equity ETFs or mutual funds.<br />
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Before ending this posting I want to stress how incredibly low the MER are for these products. You can have $10000 invested across about 250 different companies in the composite TSX index, and your annual fees are $6.00. That is truly good news for investors!<br />
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<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions. The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
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<i>Disclosure: The author of this column holds the following ETFs mentioned in this article in one or more account: HXT, VCN, and XIC. I also use Scotia iTRADE discount brokerage services. No compensation by any company has been offered, requested or received for writing this column.</i></div>
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Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com1tag:blogger.com,1999:blog-7100356854525015128.post-53828436537860084012017-03-03T07:46:00.004-08:002018-08-03T13:22:19.397-07:00Should You Buy Only Stocks You Understand?Like many good questions, the answer to the question posed in the title is yes, but also no. Let's elaborate.<br />
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Before we start, we assume that you have decided to hold some individual stocks in your portfolio, and that is a good choice for your financial situation. That decision is a whole question in itself, and not a simple one to answer, and we will deal with in a future post.<br />
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Perhaps Warren Buffett is the best known proponent of the idea that you should only invest in what you really understand. Indeed number 7 on a <a href="https://www.fool.com/investing/2016/07/24/10-warren-buffett-quotes-that-teach-us-about-inves.aspx" target="_blank">list of Buffett investing quotes</a> is "Never invest in a business you cannot understand." Berkshire Hathaway Inc. invested mainly in big name companies operating in areas that he understood. Also, while others were rushing into technology stocks, Berkshire Hathaway Inc. stayed largely on the side (although recently <a href="http://www.cnbc.com/2017/02/27/billionaire-warren-buffett-more-than-doubled-his-holdings-in-apple-in-2017.html" target="_blank">holdings of Apple have been significantly increased</a>).<br />
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It seems obvious that you should really know a company before you invest in that company. No matter how many balance sheets you examine, how many analyst reports you read, it might be argued that you must understand the field the company operates in to truly understand it at the deepest level. It is only through that knowledge that you can reasonably predict how the company's financial situation is likely to change in coming years. Do you really understand fuel cells at a scientific and engineering level, if not why are you considering buying stocks of <a href="https://www.google.ca/finance?cid=674834" target="_blank">Ballard</a>? Do you really know the pharmaceutical industry? If not, why are you considering <a href="https://www.google.ca/finance?cid=674695" target="_blank">Valeant</a>?<br />
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So let's say you have extensive work experience and academic background in the banking business. You understand banks and insurance companies at a deep level. More than any other area of the stock market, you feel qualified to choose which companies have a bright future, and which not so much. Indeed as <a href="https://twitter.com/alex_macdonald/status/836971875934818306" target="_blank">Alexander MacDonald has pointed out</a>, if you had invested only in Canadian Banks you would have out performed an other North American sector over the past 25 years.<br />
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The problem with that approach, however, is that it totally lacks in <a href="http://fundsgarden.blogspot.com/2017/02/diversification-dont-grow-only-tomatoes.html" target="_blank">diversification</a>, and therefore your investment portfolio is expected to be more volatile. A second possible problem is that you might depend too much on your personal expert viewpoint, and not give sufficient weight to the views of investment analysts. The 2008 financial crisis emphasized this point.<br />
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However, it is important to think about diversification across your entire financial holdings. For example, if you have TFSA, RRSP and unregistered accounts, it is not necessary that each be fully diversified, but rather that in total your holdings are. There may well be tax reasons why your holdings in unregistered are different than in the RRSP. The fact that TFSA accounts are not part of international tax treaties means that certain types of holdings should not be held there (more on that in a future post).<br />
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So back to our question on stocks. If you do decide to hold a number of stocks in one or a few categories, because that is what you understand well, make sure that you balance that with broad holdings in the rest of your portfolio. Not only should no one stock represent a large part of your portfolio, but also no stock category should be a major part. <br />
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Some will work in companies where stocks in the company are either part of your compensation, or offered at an attractive price. While it makes sense to hold those stocks, make sure that it does not represent all or most of your investment holdings. There is a <a href="https://www.betterment.com/resources/investment-strategy/company-stocks/should-i-own-stock-in-the-company-where-i-work/" target="_blank">good article on this topic by Eric Rosenberg here</a>.<br />
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What are your thoughts on this topic? Why not leave a comment? As always, thanks for reading!<br />
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<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions. The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
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<i>Disclosure: The author of this column has not received any compensation from any financial company for writing this column, and has no association with any company mentioned. I do hold a small number of individual stocks, but neither of the two mentioned by name in this column.</i></div>
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<br />Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-37018941101622274642017-03-02T11:25:00.001-08:002018-08-03T12:27:05.044-07:00We Need More Personal Finance and Investment Education for Youth<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9SF8wScQKHvxbMWvCgpjzcEcJniYKyKSGXrbUqU3WnXX-eB7zwildUVgLF2J3xf7i_mzv3i4s7512zJ-svx4zwT6kNGMyJBBBJyXmbnv40n_Hd8Amki29QxYva9QA3lWZVqDsnuUdSDs/s1600/students_pixabay.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="148" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9SF8wScQKHvxbMWvCgpjzcEcJniYKyKSGXrbUqU3WnXX-eB7zwildUVgLF2J3xf7i_mzv3i4s7512zJ-svx4zwT6kNGMyJBBBJyXmbnv40n_Hd8Amki29QxYva9QA3lWZVqDsnuUdSDs/s200/students_pixabay.png" width="200" /></a>A bit over a year ago CBC news ran <a href="http://www.cbc.ca/news/canada/why-kids-should-be-taught-personal-finance-in-school-and-at-home-1.3212530" target="_blank">this story</a> on why children, youth and young adults should be taught personal finance in school and at home. It is an important point, and one that has received far too little attention.<br />
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Most concepts are best learned through a spiral approach. The same topic is encountered at different ages, each time with a higher sophistication. This certainly works in the world of physics. For example, a physics graduate will learn mathematically sophisticated abstract mechanics ideas in upper level undergraduate courses. But a few years earlier the student encountered Newton's laws in vector form in first year university, and before that the same laws in high school physics in simpler situations. Even earlier the student sees mechanics ideas in a more qualitative fashion in junior high. At a qualitative level mechanics concepts are encountered even earlier in elementary grades. I talked about force and gravitation and orbits with grade 1 students last month. As I see in my own grandchildren, children can experience a lot of mechanics in building block towers, rolling objects down inclines, playground equipment, and a number of other forms of play.<br />
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Financial education will be most successful if it is similarly encountered with increasing sophistication at different stages in life. Young children can begin to learn with store and bank play, and a bit later they can be introduced to the concept of saving for something special, and making simple financial decisions. Some families successfully include children in annual family budget meetings or financial choices. Once students are about to start university, they should have an active role in planning how to finance their post-secondary education.<br />
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So what should schools do? The <a href="http://business.financialpost.com/personal-finance/young-money/how-canadians-are-taught-financial-literacy-from-coast-to-coast" target="_blank">Financial Post had a recent article</a> that looked at how Canadian students in each province are exposed to financial planning ideas. While there are many promising initiatives, as some commenters have pointed out the reality is uneven at best. A key decision is whether financial education should be in stand alone courses, or integrated into other topics in the curriculum, or both.<br />
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As well as understanding concepts, such as the value of future money, handling credit responsibly, and building a personal budget, it is essential that students learn about risk and reward, investment options, diversification, and the difference between passive and active investment vehicles.<br />
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Various organizations offer resources that can be used by schools and parents for financial education. For example, <a href="http://practicalmoneyskills.ca/">practicalmoneyskills.ca</a>, an initiative supported by Visa Canada, have games, information, and detailed class lessons with presentation materials and suggested activities on topics in personal finance and to some degree saving and investment.<br />
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While some universities offer financial planning as a course open to students in all programs, such courses are not yet widely available. Athabasca University offer by distance education a comprehensive personal financial planning course <a href="http://www.athabascau.ca/syllabi/fnce/fnce322.php" target="_blank">Finance 322</a>. It has, in my opinion, a nice balance of topics important to individuals for their personal finances and investments. The most recent version of the course is also approved as part of the <a href="http://www.fpsc.ca/" target="_blank">Financial Planning Standards Council FPSC Level 1 certification</a>.<br />
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The <a href="http://www.getsmarteraboutmoney.ca/en/managing-your-money/planning/case-studies/Pages/default.aspx#.WLhmdbGZN24" target="_blank">case studies</a> at <a href="http://getsmarteraboutmoney.ca/">GetSmarterAboutMoney.ca</a> could be effectively used in junior high, high school or university courses dealing with these topics. They also have a wealth of linked information on various topics.<br />
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Check through <a href="http://www.heqco.ca/en-ca/About%20Us/Events/Pages/EducationalFinancialLiteracy.aspx" target="_blank">the article produced by the Higher Education Control Council of Ontario</a> for a white paper with links to various organizations that have materials to support financial literacy.<br />
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In a future column I will be commenting on why the Canadian stock markets are somewhat light in high technology offerings, surprising in a country with high educational achievement and scientists and engineers who are internationally recognized. As a small part of the solution, I feel that we need to more effectively integrate economic aspects into the science and technology curriculum. A few years ago I taught an undergraduate physics course on energy issues. As well as the usual physics topics, students collaborated on the financial analysis of wind energy parks, and considered economic and scientific aspects in selecting good energy companies to invest in.<br />
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We see in elite athletes, accomplished scientists, distinguished writers, and others, the importance of engaging with a topic early in life. I think we miss a huge opportunity by not introducing children and young adults, in an appropriate way, to investments. Warren Buffett apparently <a href="http://www.biography.com/people/warren-buffett-9230729" target="_blank">made his first investment, 3 shares, at age 11</a>. Ideas of financial risk and reward, and the importance of using evidence in making choices, should be taught early and often.<br />
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<br />Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-34330291627453689972017-02-28T06:19:00.001-08:002018-08-03T13:18:57.322-07:00When is the MER not what you think it is?<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFMsmsklGrTNUrxTGG_FXjpeuWda0Oig_Yuyva03K-wOUfcF7FlCsVxi762oMFVHtAOwyaK21kczBZ-dNugDrqwXsWHGH6DmVm707C_XTg8ArPHWJitFx65sZ4zI8ht1UWzztIxMd_pc4/s1600/PixabayMod_coins.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="162" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFMsmsklGrTNUrxTGG_FXjpeuWda0Oig_Yuyva03K-wOUfcF7FlCsVxi762oMFVHtAOwyaK21kczBZ-dNugDrqwXsWHGH6DmVm707C_XTg8ArPHWJitFx65sZ4zI8ht1UWzztIxMd_pc4/s200/PixabayMod_coins.jpg" width="200" /></a>Although I don't follow the model portfolios exactly, I am a big fan of the principles of the <a href="http://canadiancouchpotato.com/" target="_blank">Canadian Couch Potato</a>. It has demonstrated the virtue of staying invested in a diversified, low cost, small and easily understood set of broad index funds. It is called couch potato since you rebalance about every year, but otherwise just leave it alone. The simple couch potato portfolio has had solid performance and limited volatility over the long run, bettering many mutual funds, all with very low fees.<br />
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I suspect most readers are already very familiar with the <a href="http://canadiancouchpotato.com/" target="_blank">Canadian Couch Potato</a> but in case you are not, I urge you to regularly consult their website, and to give full consideration to their model portfolios. Recently they have also started a <a href="http://canadiancouchpotato.com/2016/11/30/podcast-1-are-you-ready-for-diy/" target="_blank">podcast series</a> that I also recommend.<br />
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The folks at <a href="http://canadiancouchpotato.com/" target="_blank">Canadian Couch Potato</a> have model balanced index portfolios for conservative to aggressive investors. They show how to implement them using ETFs, Tangerine investment funds, or TD e-series products. Interestingly, the long term performance only varies slightly across the different risk portfolios, but that is a topic for another post.<br />
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The other day I was examining their <a href="http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-ETFs-2016.pdf" target="_blank">ETF based model portfolio</a> (see screen capture below), and I was struck that the values they gave for weighted MER for each portfolio seemed too low to me.<br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjolPxzF38WUyRYscuBGCl-IK2c0bsB91gITjVzK8FZDFxgMGFVVaKp4aaAhR0qcJNWbuUMTyBvYUBTJMvnMmp-MxJNOl_Q9GO_09Bdc4sg13IhyFz_5aeMNP8466PrjSI6iufcDe329Ls/s1600/CouchPotatoFeb2017.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="236" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjolPxzF38WUyRYscuBGCl-IK2c0bsB91gITjVzK8FZDFxgMGFVVaKp4aaAhR0qcJNWbuUMTyBvYUBTJMvnMmp-MxJNOl_Q9GO_09Bdc4sg13IhyFz_5aeMNP8466PrjSI6iufcDe329Ls/s400/CouchPotatoFeb2017.png" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Screen capture (Feb 2017) of the <a href="http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-ETFs-2016.pdf" target="_blank">Couch Potato model ETF portfolios</a>. Note the weighted MER line.</td></tr>
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Although I don't hold the BMO bond ETF ZAG, I had recalled that the MER for it was 0.23%, and I knew that the Vanguard Canada broad Canadian equities ETF VCN (which I do own) has a MER of 0.06% and the iShares All World Except Canada equity ETF XAW (which I also own) has a MER of 0.21. Even without a calculator, there was no way, using these numbers, the weighted average MER on the conservative couch potato portfolio would be only the 0.12% stated.<br />
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Just to be certain, I first checked with both <a href="http://quote.morningstar.ca/quicktakes/ETF/etf_ca.aspx?t=ZAG&culture=en-CA&region=CAN" target="_blank">morningstar.ca</a> and with <a href="https://www.bmo.com/gam/ca/advisor/products/etfs?fundUrl=%2FfundProfile%2FZAG#fundUrl=%2FfundProfile%2FZAG" target="_blank">BMO directly</a>, and sure enough both currently (late Feb 2017) give 0.23% as the MER for ZAG. I proceeded to calculate the weighted MER for some of the portfolios using that value, and for the conservative model portfolio it was 0.209%, versus the Couch Potato value (see screen shot above) of 0.12%, while for their balanced portfolio, with 40% Zag, 20% VCN and 40% XAW, I calculated a weighted MER of 0.188 versus the stated value of 0.14.<br />
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I could see from the weighted MER values in the model portfolios that the difference must be in ZAG, since the differences were higher for the portfolios more highly weighted in that, so I dug around a bit more. The ZAG MER value that they used in their calculations was 0.10%, not 0.23%, I was able to determine by backward engineering from the weighted MER. If I assume that value for the ZAG MER, I obtained 0.118 for the conservative portfolio and 0.136 for the balanced one, both consistent with the weighted MER given on the Canadian Couch Potato site. So you ask, which is the correct value for the ZAG MER, 0.23% or 0.10%?<br />
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The stated MER for funds is normally obtained from audited financial statements. Of necessity that is based on results from the recent past, since the auditors only get to work after the financial documents for the financial year have been completed. In the BMO ZAG case an asterisk notes that the MER is based on the 2015 year audited statements.<br />
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Since that time, BMO have announced lowering of management fees on a number of their ETFs, including this one. For ZAG, they lowered the management fee to 0.09, and they estimate that that will result in a current MER of about 0.10. Problem solved.<br />
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There are several implications for investors, however. The true MER is based on audited financial documents. Since management fee is the dominant component of most ETF MERs, if that is announced as lowered, we can expect the MER will drop by a similar amount. For most ETFs the MER is pretty stable from year to year. If the MER has dropped significantly, we need to evaluate whether we are confident that it will stay at this lower value, and if the return of the fund will change due to the different amount of investment advice, supposedly related to the management expense.<br />
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Secondly, when making long term ETF choices and comparing similar products, it is important to go beyond the stated MER, to make sure that there are not significant recent changes that will influence the current and future effective MER. For example, with the previous MER for ZAG, it appears obvious that the similar bond ETFs VAB from Vanguard Canada and XQB from iShares have lower MER values. That situation is reversed, however, with the lowered management fees for ZAG.<br />
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While the MER is to be based on audited statements, the management fee can be adjusted to the current value. An easy way to check if there has been a significant change is to examine both the MER and management fee for the fund you want. Normally the management fee makes up most of the MER. If they are very different, check around for announcements of recent management fee changes, and in particular check company statements about whether the lowered fees are temporary or a long term change.<br />
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Some readers will correctly point out that the difference here is small enough that it may well be lost in your overall financial fees. If you had invested $10,000 in ZAG the difference per year in the two MER values would be $13.<br />
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<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions. The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
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<i>Disclosure: The author of this column holds the following ETFs mentioned in this article: VAB, VCN, XAW and XQB.</i></div>
Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com2tag:blogger.com,1999:blog-7100356854525015128.post-50411110087939621122017-02-26T10:22:00.001-08:002018-08-03T13:18:09.690-07:00Review: The 3 Simple Rules of Investing<div style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;">
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<tr><td class="tr-caption" style="text-align: center;"><a href="https://www.amazon.ca/gp/product/B00GT486QQ/ref=as_li_tl?ie=UTF8&camp=15121&creative=330641&creativeASIN=B00GT486QQ&linkCode=as2&tag=bayfunnet-20&linkId=0c4cde2f577a4dbbb13678d01ee17803">Link to purchase book.</a></td></tr>
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A few months ago I read the excellent book, <a href="https://www.amazon.ca/Simple-Rules-Investing-Everything-Instead-ebook/dp/B00GT486QQ/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1488130204&sr=1-1" target="_blank">T</a><a href="https://www.amazon.ca/gp/product/B00GT486QQ/ref=as_li_tl?ie=UTF8&camp=15121&creative=330641&creativeASIN=B00GT486QQ&linkCode=as2&tag=bayfunnet-20&linkId=0c4cde2f577a4dbbb13678d01ee17803">he 3 Simple Rules of Investing,</a> by Michael Edesess, Kwok L. Tsui, Carol Fabbri and George Peacock. In their book, they make the startling statement that "everything you've learned about investing is wrong".<br />
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So what are their three simple rules?<br />
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<li>Simplify Your Options</li>
<li>Look Only Forward</li>
<li>Tune Out Noise</li>
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You will need to read the entire book to hear their rationale, but not surprisingly they favour broad, low cost index funds over specialized investing instruments. They also favour a long term approach, and to 'tune out' the vast majority of advice you will hear or read from financial writers and advisors.<br />
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By look only forward, they warn against placing too much faith in how a certain fund has done in the past. As we all know 'past performance does not guarantee future results'. For example, as David Berman (among others) has written, the simple strategy of <a href="http://www.theglobeandmail.com/globe-investor/inside-the-market/cibc-rebounds-to-become-the-top-bank-stock-for-2017/article33406446/?" target="_blank">investing in the Canadian big bank that performed worst in the past year,</a> yields better results than trying to pick the best bank stock in more sophisticated ways, or holding a basket of banks.<br />
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As well as their three simple rules, the authors identify seven deadly temptations. Some of these are obvious and widely accepted, such as 'Don't try to beat the market', while others may seem contrary to common sense. They urge small investors to not follow what most wealthy and sophisticated investors do. This is not because it would be difficult or impossible, but rather because most high worth individuals use high powered financial advisors and typically pay large fees for expert advice. There is little indication that this advice has resulted in better investment returns. Warren Buffett has emphasized this point in his 2017 statement, making the claim that <a href="https://www.bloomberg.com/news/articles/2017-02-25/buffett-says-100-billion-has-been-wasted-on-investment-fees" target="_blank">high worth individuals have spent $100 billion in unnecessary fees</a>.<br />
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While I would not agree with everything in the book (for example, I believe they argue for too much simplification), I do support the main tenets. I certainly recommend that you read this book as one part of your investor education. As one Amazon reviewer has written "<span style="background-color: white; color: #333333; font-family: "verdana" , "arial" , "helvetica" , sans-serif; font-size: x-small;">If you read only one investment guide in your life, make it this one elegantly boiled down to the essence of what makes sense and makes money."</span><br />
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I agree 100% with their statement: "Don't trust it all to the expertise of someone else". Indeed my decision to start this site was largely because I fear that too many trust too blindly in investment advice. You can, and should, learn about your financial options, and you should take ownership of your financial future.<br />
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It's interesting that they also warn about over reliance on modern 'scientific' financial theory. That will be a topic for some future column.<br />
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Some of their advice is very practical, and can be immediately applied to your portfolio. They argue that it does not make sense to hold a large number of specialized funds for diversification, if in total they essentially mimic the entire equity market. Why not just get one total market fund?<br />
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I highly recommend <a href="https://www.amazon.ca/gp/product/B00GT486QQ/ref=as_li_tl?ie=UTF8&camp=15121&creative=330641&creativeASIN=B00GT486QQ&linkCode=as2&tag=bayfunnet-20&linkId=0c4cde2f577a4dbbb13678d01ee17803">The 3 Simple Rules of Investing</a>!<br />
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From time to time I will review investment books. Have a favourite? Why not leave a comment, and we will consider making it a topic for a future column (or if you prefer to review it yourself, we welcome guest posts.) If you were going to read three Canadian investing books, what would they be?<br />
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<i>This column is intended for education only. The reader is responsible for their own financial decisions. The writer is not a financial planner and reading this column should not be interpreted as obtaining individual financial planning advice. For major financial decisions it is always wise to consult skilled financial professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader. </i><br />
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<i>Disclosure: I have read this book and have no association with the publisher or authors. I did not receive a copy of the book, or any other benefit, for writing this review.</i><br />
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Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-33076166910980957162017-02-25T10:34:00.001-08:002018-08-03T13:17:27.424-07:00If you can use Facebook, you can manage a discount brokerage accountThe majority of individual investors have so far shied away from opening a discount brokerage account. I think the main reason is that they view the process as more complex than it really is.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWsom-dUmMJiNvszaXMDSCicKacb11k-RiRdsPXFXeJCiCOae-UO6Lt0UsfueLzUvyoV4hkUbSKmEbE2UpINbvVDehsUvF0Lc3RhlP4CSnU1kaM6XVBpwWXSMymzvGkFGCFWsrWbcba24/s1600/facebook-715811_pixabay.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="109" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWsom-dUmMJiNvszaXMDSCicKacb11k-RiRdsPXFXeJCiCOae-UO6Lt0UsfueLzUvyoV4hkUbSKmEbE2UpINbvVDehsUvF0Lc3RhlP4CSnU1kaM6XVBpwWXSMymzvGkFGCFWsrWbcba24/s200/facebook-715811_pixabay.jpg" width="200" /></a>I am an occasional Facebook user, but I must say, even though I consider myself overall moderately online sophisticated, I find aspects of the Facebook interface intimidating. Yet from early teens to grandparents, there are almost two billion Facebook users worldwide. There is no doubt that most people can become proficient Facebook users, and value the experience. I would argue that operating an online discount brokerage account is no more difficult than using a Facebook account. Indeed, for me I find it simpler.<br />
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<h3>
Overview of a Discount Brokerage Account</h3>
Let's start from looking at how a discount brokerage account works. With a discount brokerage account you purchase and sell individual stocks from the Canadian and US markets, as well as bonds, and exchange traded funds (ETFs). Most discount brokerage accounts also allow purchase (and redemption) of mutual funds, and many also give you access to investment savings accounts and guaranteed investment certificates (GICs).<br />
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Most individuals will want to open several accounts, for example an unregistered account, an RRSP and a TFSA. These will all show up in your list of accounts when you log on to your discount brokerage account. You will have an account number (and/or user name) and password to log in to all of your accounts at once held in your discount brokerage account. The display will show you the list of holdings in each account, along with information on how well each has performed.<br />
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Your discount brokerage account will also normally be linked to one or more external bank accounts, and you will transfer funds into or out of the brokerage accounts from these accounts. You fill out forms, and use a cheque, to initially set up these linked accounts. For accounts with the same financial firm (e.g. Scotiabank bank accounts with a Scotia iTRADE account), the transfers will normally occur immediately, while linked accounts to another financial institution will normally take two days for funds transfer. <br />
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Each discount brokerage account will have a cash component, or possibly two, one in US funds and one in Canadian funds. These cash funds normally earn no interest, so you generally only keep small amounts as cash in the long term.<br />
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You use funds available in the cash component to buy stocks, ETFs, bonds or other items. The process for a stock or an ETF purchase are identical, since they are both traded on a stock exchange. You purchase these in numbers of units, and you must find the code for the stock or ETF you wish to purchase. For example, if you wanted to buy the Bank of Nova Scotia on the TSX the code is BNS (sometimes written as BNS-T to indicate the Toronto Stock Exchange).<br />
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In a future post we will talk about how to decide how much to offer to pay, but in general you will use what is called a <i>Limit </i>price, which means you set the maximum amount that you are willing to pay. You can also specify how long you want your offer to purchase to remain open, from the current day up to several weeks in the future, and may select options such as only complete the trade if it is possible to trade the full number of units.<br />
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Before it is confirmed, you will have an option to check your order, making sure that the code for the stock and the price/time period are both correct. Normally you use a second code, different from your password, as trading confirmation.<br />
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When the discount brokerage finds a seller willing to sell that stock or ETF at your limit price, they will conduct the sale on your behalf, and the units will then show up in your list of holdings. It is possible that they will purchase the units from several different buyers, so they may not all show up at the same time (or ever). You have an option to cancel an order that has not yet been filled.<br />
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You pay a commission on most purchases (there are exceptions we will cover in a future post), both when you buy the units and when they are sold. For this reason, it is normally not wise to purchase small numbers of units, but rather save until you have sufficient funds to buy a larger number. The commission charged typically ranges from about $5 to $15.<br />
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When you are ready to sell stocks or ETFs, the reverse process is similar. You set a price, and time period, and your discount broker will seek to find a buyer, and when the units are sold they will disappear, and cash will appear in your cash part of your discount account, where it can be transferred to other bank accounts.<br />
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Note that there is a delay between when the sale or purchase occurs, and when the transaction has settled. It is only when it is settled that the funds are available to transfer out, although your discount brokerage may allow you to use the funds for another purchase in the interim. The delay from trade date to settle date is normally 3 to 4 days for stocks and ETFs.<br />
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With most discount brokerage, unless you pay a higher fee, you must place the order during regular trading hours (9:30 am to 4:00 pm Ontario/Quebec time). You can set the time period as over a number of days or even weeks, but you must place the order when the stock exchange is open.<br />
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Purchase of mutual funds is similar but simpler. These are normally purchased in dollars (rather than number of units), and you don't set the price as it will be at the current price automatically. The mutual fund will have a code which includes letter for the fund company and a number for the type of mutual fund. For example, MAW104 is a balanced mutual fund from Mawer. You can place the mutual fund order at any time, but there will be a certain time that is used to determine which day's fund price will be used for the purchase.<br />
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The bond process is somewhat similar, but different enough we will not cover it here. Our recommendation for most individuals is to hold your bonds through ETFs, rather than through direct bond holdings. We also have not covered items such as margin accounts, which we do not recommend, at least for someone beginning with a discount brokerage account.<br />
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<h3>
What a Discount Brokerage Account is NOT</h3>
A discount brokerage account is not a financial advisor. While there are tools that will allow you to research information on mutual funds, stocks, exchange traded funds and ETFs, a discount brokerage account is not intended to offer you any advice on what you should hold in your portfolio. It is a tool to buy and sell investments, not guidance on what those investments should be.<br />
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You are in charge, and you make the decisions of when and what to buy and sell. Your discount brokerage should provide an easy to use interface to do this, at a reasonable cost. It should provide transparency on your holdings and their performance over time.<br />
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<h3>
Canadian Discount Brokerage Companies</h3>
The major banks offer discount brokerage accounts, as do a number of other companies. Here is a list of some of the main players in the Canadian market.<br />
<ul>
<li><a href="https://www.bmo.com/self-directed" target="_blank">BMO InvestorLine</a></li>
<li><a href="https://www.investorsedge.cibc.com/ie/index.html" target="_blank">CIBC Investor's Edge</a></li>
<li><a href="https://www.desjardins.com/ca/personal/savings-investment/disnat-online-brokerage/index.jsp">Desjardins Online Brokerage</a></li>
<li><a href="https://invest.hsbc.ca/cam30_login.aspx" target="_blank">HSBC Invest Direct</a></li>
<li><a href="http://nbdb.ca/"><span id="goog_668647199"></span>National Bank Discount Trade<span id="goog_668647200"></span></a></li>
<li><a href="https://www.qtrade.ca/investor/" target="_blank">Qtrade Investor</a></li>
<li><a href="http://www.questrade.com/">Questrade</a></li>
<li><a href="https://www.rbcdirectinvesting.com/" target="_blank">RBC Direct Investing</a></li>
<li><a href="http://www.scotiabank.com/itrade" target="_blank">Scotia iTRADE</a></li>
<li><a href="https://www.td.com/ca/products-services/investing/td-direct-investing/index-res.jsp">TD Direct Investing</a></li>
</ul>
<a href="http://www.theglobeandmail.com/globe-investor/investor-education/annual-online-brokerage-ranking-carrick/article33238778/">Rob Carrick regularly reviews discount brokers</a>. <a href="http://www.moneysense.ca/save/investing/canadas-best-online-brokerages-2016/">Moneysense also review discount brokerages</a>. I strongly recommend reading these reviews to narrow your choices, but then consider the list below on what to look for in a discount broker to see which is the right fit for you, rather than simply going by the overall letter rating.<br />
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<h3>
What to Look For in a Discount Broker</h3>
We could write a number of columns on what to look for when selecting a discount broker, but at this time will offer a list of some features. You should decide which are most important to you.<br />
<ul>
<li><b>Commissions </b>Since most trades will result in commissions, both at the time of purchase and sale, it is important to be clear on these costs. Some companies will have different commissions depending on how active you are as a trader, and/or how much you have invested, so be sure to know the commission that will apply to you.</li>
<li><b>Other Fees</b> Some companies have other fees for certain types of accounts if the amounts held are less than a certain minimum. There will also normally be fees for closing an account. Be clear on the other fees that you are likely to incur.</li>
<li><b>Exchange Rates</b> If you plan to hold US dollar stocks or ETFs find out how currency exchange works, and whether you can hold cash in US dollars (for example if you sell a US stock, and then want to use that money to buy another US stock, can you keep it in US funds to not incur two currency exchanges).</li>
<li><b>Ease of Use</b> Some discount brokerage accounts are easier to use than others, so try to use independent ratings to narrow your search to two or three finalists, and then have them demonstrate their platform before you make your final selection.</li>
<li><b>App</b> Most discount brokerages have some sort of app to use with their accounts, but this may have limitations compared to the full web access. If this is important to you, check out the features and ease of use of the associated app on your platform of choice (iOS or Android).</li>
<li><b>What Can You Buy</b> If you plan for your portfolio to hold mutual funds as well as stocks and ETFs, make sure that your discount brokerage allows this (and not just for mutual funds from that financial institution). If you would like to hold GICs within your investing accounts, see if that is available.</li>
<li><b>Research</b> While there are many sources of research outside of your discount brokerage, it is certainly convenient if you can get detailed research information, including analyst reports, within your discount brokerage account. Ask what is available before you make your final decision.</li>
<li><b>Reports</b> You don't want to have to separately manage reports so that you will know how much income your LIF or RIF accounts will generate in the next year, or what the overall past performance of your different accounts have been. Make sure that this, and more, is readily available. When you sell instruments you will need to pay capital gains income tax on the profit, so it is important that Realized Gain/Loss is also readily tracked.</li>
<li><b>Linked Accounts</b> Make sure the process is easy to link ideally more than one bank account to your discount brokerage. If you find everything else about equal, there are advantages to setting up your discount brokerage account with the institution you currently bank with.</li>
<li><b>Stability</b> It is cumbersome to change discount brokers, so make your initial choice carefully. Consider how stable the institution is, and how confident you are that they will still be operating in the discount brokerage field in 20 years (or whatever your investment horizon is).</li>
<li><b>Special Features</b> Almost all of the companies will offer special features, like inducements to set up an account (agreeing to pay transfer fees or offering so many free trades), items that will have no commissions on purchase or sale, etc. Is a practice account important as you get familiar with trading, and if so is one offered? One advantage of the TD Direct Investing is that it provides access to the <a href="http://www.tdcanadatrust.com/products-services/investing/mutual-funds/td-eseries-funds.jsp" target="_blank">TD e-Series</a>. Scotia iTrade have about <a href="http://www.scotiabank.com/itrade/en/0,,4200,00.html" target="_blank">50 commission free ETFs</a> if you set up your discount brokerage account with them.</li>
</ul>
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</h3>
<h3>
Final Thoughts</h3>
If you still feel that a discount brokerage is not for you, you may want to consider a financial advisor who will, in addition to offering advice on what you should hold in your investment portfolio, assist with the mechanics of purchasing stocks, ETFs or mutual funds on your behalf. Discount brokerage firms such as Scotia iTRADE have forms that allow you to designate someone as a trading authority on your account. The account will be yours, but they will be able to make trades on your behalf (but not withdraw funds from your account). It is sort of like learning to fly, having a pilot and co-pilot, either one of which can run the show. If you feel comfortable giving this role to a trusted family member, your designated trading authority does not need to be a financial professional.<br />
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If you don't want to get involved at all in a discount brokerage account, then a robo-advisor might be the best choice for you. We will cover these in a future column, but essentially you provide a profile online about your situation, plans, risk aversion, etc., and the robo-advisor will make a choice on how you should be invested, and purchase the instruments (usually ETFs) for you. <br />
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Another option is to use a balanced mutual fund, which can be purchased through an institution or advisor or directly in some instances such as the Tangerine Investment Funds).<br />
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But our central argument is that operating a discount brokerage account is not rocket science. If you do online banking to pay bills and transfer funds, you can learn to handle a discount brokerage account. If you use Facebook proficiently, you are already over-qualified, in my opinion! With a discount brokerage account you will have access to many excellent low-cost investment vehicles that are not otherwise available to you.<br />
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<i>This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions. The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
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<i>Disclosure: The author of this column has a number of discount brokerage accounts, registered and unregistered, held through Scotia iTRADE, and has been a long term investor using that platform since its inception. </i><i>No compensation by any company, organization or individual has been offered, requested or received for writing this column, and no association is implied.</i></div>
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<br />Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com6tag:blogger.com,1999:blog-7100356854525015128.post-723103030455610442017-02-22T09:06:00.001-08:002018-08-03T12:24:11.633-07:00Diversification: Don't Grow Only Tomatoes!<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvSv6X0nzUKj207t0122ApGEjAlvbvSAkXZMP2vYtzibB2Jn6QKmBvO9HcKF6kJ09NbZy3mx_MOzSspIZyWIH6pFXhImgswjGWvPvEencGT_SpmD-AaIfLEsUCjM6MEc5MmcdjVodq75Y/s1600/tomatoes_pixabay_Couleur.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="131" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvSv6X0nzUKj207t0122ApGEjAlvbvSAkXZMP2vYtzibB2Jn6QKmBvO9HcKF6kJ09NbZy3mx_MOzSspIZyWIH6pFXhImgswjGWvPvEencGT_SpmD-AaIfLEsUCjM6MEc5MmcdjVodq75Y/s200/tomatoes_pixabay_Couleur.jpg" width="200" /></a>Returning to our garden metaphor, let's assume you have a large parcel of agricultural land and that you want to make money by growing crops on it. While an analysis could be done to indicate, from crop yield and historical crop selling prices, what one crop would give you the most money per area for your farm land. Indeed, if your only goal is to have the largest statistical return on your farm investment, growing that one crop is the best choice.<br />
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Let's say you have determined that the optimum crop is tomatoes. If you have only one crop though, your risk will be higher when you grow just tomatoes than if you had a mixed garden. The reason for this is an event such as a late frost, a blight, or a pest that affects only tomatoes could wipe out almost the entire crop for a year.<br />
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If instead you grow a number of different crops, it is likely that environmental or other factors will not affect them all equally. In fact, a cold wet season that is bad for some crops may be good for other crops.<br />
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<h3>
Diversification</h3>
The idea of investing in different sectors to limit risk is called <i>diversification</i>. For individual investors while return on investment is important, limiting risk is also crucial. For those in or near retirement, the need to limit investment is even more critical, since there is less time to rebuild after major stock losses.<br />
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A similar situation applies to investments, where diversification across different investments can help limit the amount of risk. This is because changes in the economy affect different regions and industries differently. While rising interest rates might be negative for one industry, it might be positive for another, while another is not interest rate sensitive at all.<br />
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We can diversify by making sure we hold enough different stocks, and that those stocks represent different types of companies from different regions. It is also critical to hold bonds as part of your diversified portfolio, and possibly other investment types. The next section provides more detail.<br />
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<h3>
Types of Diversification</h3>
So how do you effectively diversify?<br />
<ul>
<li><b>Stocks and Bonds</b> Generally speaking high quality bonds go up in value when stocks go down, and vice versa, so having a mix of stocks and bonds is the first rule of diversification. The exact mix will depend on your risk tolerance and financial situation, generally holding a higher amount in bonds later in life.</li>
<li><b>Different Industries</b> Sometimes overlooked is the importance of having a good mix of different types of industries represented in your portfolio. You could be invested across the entire Canadian stock exchange, and still not have good industry diversification, since financial institutions and energy play such a large role in the exchange.</li>
<li><b>Different Regions</b> While the global financial world is interconnected, and it is likely that major stock losses in one region will influence others, that does not mean that they will be equally affected. As well as Canada and the United States it is important that you have holdings in the rest of the developed and emerging markets too.</li>
<li><b>Alternative Investments</b> While stocks and bonds have been the traditional base for most investment portfolios, alternative investments, things like real estate trusts (REIT) or infrastructure, can further diversify your portfolio. These alternative investments can be particularly important if you need regular income from your investments.</li>
<li><b>Types of Bonds</b> As well as having bonds as part of your diversified portfolio, those bonds themselves should be diversified. Your rate of return will be higher on bonds with longer durations, but longer duration bonds will be more sensitive to interest rate changes. Also, a mix of government and corporate bonds is probably appropriate. Finally, it may make sense to hold some bonds, or similar instruments, that adjust their value according to interest rates.</li>
<li><b>Different Sizes </b>Sometimes the largest companies in a market perform better or worse than the smaller companies. Therefore we can add a bit of diversification by having instruments that hold companies of varying sizes, not just the largest 60 in the TSX or the largest 500 in the Dow stock exchange in the US.</li>
<li><b>Commodities</b> I do not personally hold commodities in my investment funds, but some argue that this is yet another way to diversify, especially if one holds a mix of precious metals, oil, minerals and other commodities.</li>
<li><b>Cash-Like Instruments</b> Sometimes overlooked is the importance of having some funds in things like investment savings accounts or GICs. With these a part of your portfolio is fully protected, and they can help you weather a significant stock market crash. If you use your investments to fund your retirement through income, we recommend at least a year worth of funds in these instruments.</li>
</ul>
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Our list is somewhat longer than many diversified portfolios. In our view the current economic climate, with interest rates very low, the major developed economies having high valuations, and considerable political and economic uncertainty around the world, we feel it is important to be more diversified than was required in the past.</div>
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<h3>
Achieving Diversification</h3>
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Upcoming posts will show how you can achieve a diversified portfolio using different instruments - mutual funds, ETFs and other options. At this point we will briefly mention two possibilities that may appeal to starting investors.</div>
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<ol>
<li><b>Tangerine Investment Funds </b> If you are a Tangerine customer, it is easy to add one (or more) of their <a href="https://www.tangerine.ca/en/investing/investment-funds/investment-fund/index.html" target="_blank">balanced investment funds</a>. These have relatively low MER, are easily purchased in small amounts, funds can be transferred from existing accounts, and you don't need a discount brokerage account. There are a family of funds with differing stock to bond ratios. For example, their IN220 Balanced Fund has 40% Canadian bonds, 20% Canadian stocks, 20% US stocks and 20% international stocks. The fund has a 5 year average annual performance of 8.1%, and the MER is 1.07% with the TER an additional 0.02% (see <a href="http://fundsgarden.blogspot.ca/2017/02/mer-management-expense-ratio.html" target="_blank">here</a> for a description of these terms). There is no exposure to alternative investment classes in this fund.</li>
<li><b>Balanced Mutual Fund</b> There are thousands of balanced mutual funds, we will mention only one choice here as representative of the better choices. The <a href="http://funds.rbcgam.com/pdf/fund-pages/quarterly/rbf1350_e.pdf" target="_blank">PH&N RBF1350</a> fund, now part of the RBF family, is a solid balanced mutual fund with a reasonable MER of 0.88% (if purchased in the D form through your discount brokerage). It holds about 36% bonds (mainly Canadian), 29% Canadian stocks, 17% US stocks and 15% international stocks, along with a few percent in cash. Over the past five years it has averaged almost 8.7% return. You may need a discount brokerage to get this MER with no other fees, but you can readily buy forms of this fund through financial institutions. You can start with as little as $500 initial investment.</li>
<li><b>Balanced ETF Fund </b>While there are ETFs that are a balance of stocks, bonds and other investments, as <a href="http://www.theglobeandmail.com/globe-investor/investment-ideas/strategy-lab/index-investing/why-a-couch-potato-etf-is-long-overdue/article25008733/" target="_blank">Andrew Hallam has lamented</a>, the time is long overdue for a simplified, effective <a href="http://canadiancouchpotato.com/" target="_blank">couch potato</a> type of balanced ETF. iShares do offer a number of options, including the <a href="https://www.blackrock.com/ca/individual/en/products/239562/?referrer=tickerSearch" target="_blank">XGR Growth Core Portfolio ETF</a> that is well diversified, including alternative investment classes. It has a comprehensive MER of 0.64%, and the 5 year average annual performance has been 5.5%. You will need a discount brokerage to purchase it, and unfortunately it is only thinly traded so you may need to be patient or pay a bit of premium to get units of it. Two other 'fund of funds' from iShares that you may want to consider as a one stop ETF are CBD and CBN. We will analyze these in more detail in a future post, but CBD has a tilt towards bonds and other income products, while CBN is tilted towards a balance of equities from around the world.</li>
<li><b>Set of ETFs</b> Of course it is easy to build your own diversified balanced set of holdings within a discount brokerage. The <a href="http://canadiancouchpotato.com/" target="_blank">Canadian Couch Potato</a> provide guidance on how you can do exactly that, at a very low cost. I am a fan of their approach, and especially for those far from retirement, I think one of <a href="http://canadiancouchpotato.com/model-portfolios-2/" target="_blank">their model portfolios</a> makes good sense. Nearer or in retirement, I personally choose to add some additional types of diversification (see above). In a future post I will look at ETF options for balanced accounts in more detail.</li>
</ol>
</div>
<b>Final Thoughts</b><br />
While the degree of diversification depends on your investment horizon (how long until you probably need to access funds), all of us need diversification. Any one type of investment vehicle can suffer possibly large losses, and while often markets rebound quickly, this is not always the case. Also, emotionally large shifts in book value are difficult to take calmly. A major theme in our site will always be on ways to lessen volatility while maintaining a reasonable expected performance and low investment costs. So keep following us at <a href="http://fundsgarden.blogspot.ca/" target="">fundsgarden</a> and <a href="https://twitter.com/FundsGarden" target="_blank">@FundsGarden</a>!<br />
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<i>This posting is intended for education only. The reader is responsible for their own financial decisions. The writer is not a financial planner and reading this column should not be interpreted as obtaining individual financial planning advice. For major financial decisions it is always wise to consult skilled financial professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
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<i>Disclosure: The author of this column holds funds in the RBF1350 Balanced Fund and in the iShares CBD, CBN and XGR ETFs mentioned. I am a Tangerine customer, but do not hold any of their investment funds at the current time.</i></div>
Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-39157488763252614402017-02-19T09:38:00.002-08:002018-08-03T13:12:54.129-07:00MER (Management Expense Ratio)<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibPZ7eZdXGb3DgkQjZ1-vxLn2sK9iCmbbSOcPbCeB6Esl3KJU072V_eXTFIxeClBy1BMoy55H9Wc1qqKWHxIr_I_BF9ZQJk4ejyq2ffbv8Q3Wmvz9QHwgA5jzAH5y8vnl4e91DUZLMSHc/s1600/MER.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="95" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibPZ7eZdXGb3DgkQjZ1-vxLn2sK9iCmbbSOcPbCeB6Esl3KJU072V_eXTFIxeClBy1BMoy55H9Wc1qqKWHxIr_I_BF9ZQJk4ejyq2ffbv8Q3Wmvz9QHwgA5jzAH5y8vnl4e91DUZLMSHc/s200/MER.png" width="200" /></a>One key to sound investing decisions is to not over-pay for services. The <i>management expense ratio (MER)</i> is the most important measure of the expense charged by a mutual fund or ETF. We introduce that term, and other fee related concepts, in this posting.<br />
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<h3>
What is the MER?</h3>
This term MER is used for both mutual funds and ETFs. If the MER is 1.00% it means that for every $100 invested in the fund you will pay $1.00 in fees each year. These fees are automatically deducted from the value of the fund, so you won't actually get a bill for these fees. However, a high MER will detract from the return on your investments, perhaps significantly so.<br />
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Where does the MER go? It provides a salary for the advisor who manages the fund (not to be confused with your personal financial planner), may include the costs associated with buying and selling stocks or bonds in the fund (but see TER below), accounting and reporting costs, legal fees, communication and marketing, and other day to day costs.<br />
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Fortunately, MERs have been steadily falling on mutual funds, and to a lesser degree on ETFs where they were already relatively low. With new fee transparency regulations coming into force, it is expected that fees will continue to fall.<br />
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<h3>
How Much is Reasonable?</h3>
The obvious question to ask is: How high a MER is reasonable?<br />
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There is unfortunately no simple answer to this question. A number of mutual funds have MERs of 2% or more, although many financial commentators consider this too high. The lowest ETF MERs are about 0.05%, but these only apply to index ETFs which track a developed stock exchange. For example the iShares <a href="https://www.blackrock.com/ca/individual/en/products/239837/?referrer=tickerSearch" target="_blank">XIC</a> and the Vanguard <a href="https://www.vanguardcanada.ca/individual/mvc/detail/etf/overview?portId=9561##overview" target="_blank">VCN</a> both track the composite main Canadian stock market, and have MER values of 0.06%.<br />
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As a general rule, we suggest you question whether you are getting value for your fee especially if a mutual fund MER is much more than 1.0, and if an ETF MER is much more than 0.5. That being said, it is important to realize some investment vehicles have legitimate reasons to charge higher fees. Some of these issues are listed below.<br />
<ul>
<li>The lowest MER usually are associated with stock only funds that track the Canadian or US stock markets.</li>
<li>Bond index funds are also low, but usually not quite as low,</li>
<li>Passive funds that track an index should, and usually do, have lower MER than active funds where a manager makes decisions on what to hold.</li>
<li>Generally speaking foreign funds have higher MER.</li>
<li>Specialized funds with smaller amounts invested have higher MER.</li>
<li>Also, not unreasonably, funds that pay out monthly income generally have higher MER than those with annual or semi-annual payouts.</li>
<li>A balanced fund that holds a mix of investment instruments will generally have a slightly higher MER, although there are excellent mutual fund choices around the 1% MER level in this category (we will write about these in a future column).</li>
<li>Some funds hedge against foreign currency fluctuations, generally at an added cost.</li>
</ul>
The superb <a href="http://canadiancouchpotato.com/" target="_blank">Canadian Couch Potato site</a> focus on reasonable fees for index funds, and we recommend you take some time on their excellent site.<br />
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<h3>
MER vs Management Fee</h3>
Many mutual funds report a <i>management fee</i> separate from the MER. The management fee reflects the direct costs of management of the fund, while the MER includes that as well as things like accounting, legal and communication costs as well. In most cases the management fee is most of the full MER, but it will always be at least slightly less. John Heinzl of the Globe and Mail has written a <a href="http://www.theglobeandmail.com/globe-investor/investor-education/understanding-mers-management-fees-and-other-costs/article548646/" target="_blank">clear article</a> on the difference.<br />
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<h3>
What is the TER?</h3>
There is also something called the <i>Trading Expense Ratio (TER)</i>, that reflects the actual commissions paid as the fund buys and sells stocks, bonds and other financial instruments. This is a bit higher when the fund is active, with more buying and selling, and rebalanced frequently, but in most cases the TER is much less than the MER. In general the TER for mutual funds is not included in the MER, and you will have to dig through the financial records to find it as not all summaries will even show it. Fortunately, the TER is normally much less than the MER, although there are examples, such as covered options funds, where it can be a significant part of the total costs.<br />
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Royal Bank have a clear statement of management fees, management expense ratio and trading expense ratio for their mutual funds <a href="http://funds.rbcgam.com/_assets-custom/pdf/cost-of-mf-investing_e.pdf" target="_blank">here</a>.<br />
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For ETFs some have an additional TER, while others include it in an all-inclusive MER. Fortunately, the largest provider of ETFs in Canada, <a href="http://canadiancouchpotato.com/2010/02/25/unpacking-etf-fees-part-4-ishares/" target="_blank">iShares, do include it in the MER</a>.<br />
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If you do need to determine the TER, it takes a bit of digging, but John Heinzl leads you through the process <a href="http://www.theglobeandmail.com/globe-investor/investor-education/understanding-mers-management-fees-and-other-costs/article548646/" target="_blank">here</a>, using the resources from <a href="http://sedar.com/">http://sedar.com</a>.<br />
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<h3>
Finding MER Information</h3>
Fortunately, it is very easy to find the MER for any mutual fund or ETF. One way is to go to a resource such as <span style="background-color: white; color: #006621; font-family: "arial" , sans-serif; font-size: 14px; white-space: nowrap;"><a href="https://www.morningstar.ca/">https://www.morningstar.ca/</a>,</span> find the mutual fund or ETF from its name or code, and then use the Quote tab. The MER will be shown near the right top of the information provided. <br />
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Alternatively you can go to the website of the ETF or mutual fund. This is shown for the iShares <a href="https://www.blackrock.com/ca/individual/en/products/239495/?referrer=tickerSearch" target="_blank">XTR</a> ETF below, with the MER highlighted. <br />
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Note that the management fee is also shown, which for this fund is 0.55% while the overall MER is 0.60%. Since this is an iShares ETF, the MER is comprehensive, and does include the TER.<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCDCgQn_M3ADJW4BhNQV4IAQTJg11vYd4kCS5-_1CE0Cfi1E-2fS_pGOgbz3UHX4dNIUi79rmaMrS2qxvdq4r4SrGiZempdl1glPAv2YfaBIIlJAIUPEqRuTQlzJXPIuTNI1zwvOOlK44/s1600/XTR_MER.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="131" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCDCgQn_M3ADJW4BhNQV4IAQTJg11vYd4kCS5-_1CE0Cfi1E-2fS_pGOgbz3UHX4dNIUi79rmaMrS2qxvdq4r4SrGiZempdl1glPAv2YfaBIIlJAIUPEqRuTQlzJXPIuTNI1zwvOOlK44/s320/XTR_MER.png" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Showing MER information for iShares XTR.</td></tr>
</tbody></table>
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<h3>
Don't Forget Other Costs</h3>
While for long term holdings the MER will be the dominant cost, there are additional costs. <br />
<br />
<ul>
<li>For ETFs there is the commission charged by the broker to buy and sell the ETF units. </li>
<li>Also, there may be foreign currency fees if the ETF is in US dollars, or at least a small foreign currency buy and sell rate difference. </li>
<li>While not a fee per se, the difference between what an ETF sells at and buys for may be significant in low volume ETFs. </li>
<li>For mutual funds there may be initial or trailing fees, or some other commission. </li>
<li>If you have a fee-only financial planner, their fees will be in addition to the mutual fund (or ETF) fees.</li>
</ul>
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<h3>
An Example</h3>
Let's see how the fees work with a realistic example.<br />
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<i>Assume that you have a discount broker that charges $10 commission for each trade (for simplicity of calculation we assume that this is the cost with taxes included). If you bought $10,000 of the XTR ETF five years ago, held it for those five years reinvesting all gains in the XTR through a no-cost DRIP program, and then resold the units, how much would you have paid in fees?</i><br />
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The MER for this fund (see above) is currently 0.60%, and for this simplified example we assume that was constant over the entire period (MER rates usually only slightly change from year to year).<br />
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The 5 year performance for this ETF according to morningstar.ca is an annual average of 4.70% (that is based on NAV, or net asset value, which takes into account both dividend payouts and change in the value of the ETF - more on this in a later column). For simplicity in this calculation we will assume that the performance has been constant in each of the years, although of course it is not at all constant.<br />
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The actual situation would have different fees and performance in each year, but the final results should be only slightly different from that shown here. XTR is an instrument usually used for regular income, but we assume that all income generated by the fund is put back into reinvestment of the fund for purposes of this example.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhv1S2nN7aBlIvO3yxkvflZXotvX6bdQ9FhzkXgc2rwTYzCwSeWfuazF9R2Z89nutly_3NNU84an9fHX3Ud9pkEZ1QJUcDovGTANxlqTScvy2dYxVX7S8iZhWZ1xe0dnbQDyg6Eu1rJNQM/s1600/XTR_Example5yr.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="246" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhv1S2nN7aBlIvO3yxkvflZXotvX6bdQ9FhzkXgc2rwTYzCwSeWfuazF9R2Z89nutly_3NNU84an9fHX3Ud9pkEZ1QJUcDovGTANxlqTScvy2dYxVX7S8iZhWZ1xe0dnbQDyg6Eu1rJNQM/s320/XTR_Example5yr.png" width="320" /></a></div>
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Because of the assumed $10 trading commission, we would only have $9990 to invest, as shown in the end of year 0 value in the table. After the first year we assume that the investment value has increased by 4.70%. The MER of 0.60% on this value indicates that we paid $62.70 in ETF fees. We don't subtract that from the $10459.53, since the MER is already calculated into the quoted performance figures.<br />
<br />
We extend similar analysis for each of the four other years, and then incur another commission charge of $10.00 when we sell the ETF.<br />
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Overall with the assumptions made you would have gained about $2558 on your original $10,000 investment, having paid about $365 in fees, including both the MER of the fund and the trading commission of your broker.<br />
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It is important to note that while we selected a specific ETF, and simplified with approximations like a constant return each year, this should not be taken as a detailed analysis of the XTR ETF.<br />
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<h3>
Final Thoughts</h3>
We will have much more on fees in future columns. If we had held similar stocks and bonds to the ETF used in the example in a balanced mutual fund which charged a MER of 2.4% (near the upper end of mutual fund fees), we can see that nearly half of the total investment return would have been absorbed by fund fees. If a fee-only advisor had charged an additional fee of 1 or 1.5% for their services, we could be in a situation where the majority of the investment gain is taken up with fees.<br />
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As in most consumer choices, the cheapest investing vehicle is not necessarily the best one. We should however, know what fees we are paying, and see if they are competitive with alternatives.<br />
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<div>
<i>This posting is intended for education only. The reader is responsible for their own financial decisions. The writer is not a financial planner and reading this column should not be interpreted as obtaining individual financial planning advice. For major financial decisions it is always wise to consult skilled financial professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
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<i>Disclosure: The author of this column holds funds in the ETFs mentioned in this column (XIC, VCN, XTR).</i></div>
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<br />Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com1tag:blogger.com,1999:blog-7100356854525015128.post-85248577919576530122017-02-18T09:27:00.003-08:002018-08-03T12:24:47.907-07:00Mutual Funds vs Exchange Traded Funds<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilkmqfR2AEGy_NWW44w6zDeJf-jDRTbaPLaebmpwMDQVUZa22L2_EoQiam4DtMNrAhKkYgmDZR1Nl7B0NJIyb7mz7R01qsGkOMWuZi2lJSTDXo5emX6XVBb7Qyc4PPD2IAR-xEIY-UNF4/s1600/MutualFundsOrETFs.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="106" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilkmqfR2AEGy_NWW44w6zDeJf-jDRTbaPLaebmpwMDQVUZa22L2_EoQiam4DtMNrAhKkYgmDZR1Nl7B0NJIyb7mz7R01qsGkOMWuZi2lJSTDXo5emX6XVBb7Qyc4PPD2IAR-xEIY-UNF4/s200/MutualFundsOrETFs.png" width="200" /></a>While purchase of individual stocks and bonds makes sense in some investing plans, for most seeking a diversified investment portfolio, mutual funds or exchange traded funds (ETFs) will be the choice. In this post we introduce these products, and examine the differences and similarities between these investment vehicles.<br />
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<h3>
Mutual Funds</h3>
Mutual funds are offered by all of the major financial institutions, as well as by companies operating only in the mutual fund space. The folks at <a href="http://www.fundlibrary.com/funds/db.asp" target="_blank">FundLibrary</a> keep track of the Canadian funds available (using the <a href="http://www.fundata.com/" target="_blank">Fundata Canada</a> database), and as of early 2017 there were 17,471 different mutual funds operated by 449 companies in Canada. The actual number of funds is larger still, since a number of funds have different clones that hold essentially the same products (there may be a form of the fund when it is sold through a discount brokerage, and a different form for those sold through financial advisors).<br />
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You can purchase mutual funds through your financial institution, through some financial advisors, or through a discount brokerage (in a few cases those with large holdings can purchase them directly from the fund company).<br />
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The expense structure for mutual funds can be complicated, but the situation is becoming simpler and much more transparent due to <a href="http://www.canadianbusiness.com/investing/mutual-fund-fees-get-cheaper/" target="_blank">recent legislation</a>. You will pay a percentage of the holdings each year to account for the operations of the mutual fund (the costs of purchasing and selling stocks, administrative costs, etc.) There may, or may not, be charges at time of purchase or redemption in addition. We will look in detail at the costs of mutual funds and ETFs in a future column.<br />
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Some mutual funds track an index (e.g. the TSX Canadian stock index, or a bond index), but many have a more complicated structure, aimed at for example providing regular income or providing the right mix of stocks and bonds for a certain retirement age.<br />
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If one is going to just hold a few financial products, a balanced fund, that holds a mix of stocks, bonds and possibly other instruments, can be the simplest choice. For example, the Phillips Hager & North (PH&N) balanced mutual fund <a href="http://funds.rbcgam.com/pdf/fund-pages/quarterly/rbf1350_e.pdf" target="_blank">RBF1950</a> holds a mix of about 36% bonds, along with equities from Canada, the USA and internationally. By going to the information sheet linked above you can see the holdings, cost, and past performance of the fund.<br />
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<h3>
Exchange Traded Funds (ETFs)</h3>
As the name implies ETFs are bought and sold on a stock exchange. For most individual investors it will only be economical to hold ETFs if you have a discount brokerage account (a topic for a future column). You purchase and sell ETFs through this brokerage account.<br />
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In Canada the major players in the ETF field are <a href="https://www.blackrock.com/ca" target="_blank">iShares by Blackrock</a>, <a href="https://www.bmo.com/gam" target="_blank">BMO Asset Management</a>, <a href="https://www.firstasset.com/" target="_blank">First Asset</a>, <a href="http://www.horizonsetfs.com/home" target="_blank">Horizons ETFs</a>, and <a href="https://www.vanguardcanada.ca/" target="_blank">Vanguard Investments Canada</a>,<br />
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The idea of an ETF is that it holds a number of financial products, usually stocks or bonds, in a package. In most case the products held match some index (or compilation of several indexes according to a formula).<br />
<br />
For example, the iShares <a href="https://www.blackrock.com/ca/individual/en/products/239837/ishares-sptsx-capped-composite-index-etf" target="_blank">XIC</a> ETF tracks the Canadian composite stock index, so in one product you hold essentially a bit of each company on the TSX, in proportion to the size of that company. <br />
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As another example the Vanguard <a href="https://www.vanguardcanada.ca/individual/mvc/detail/etf/overview?portId=9557##overview" target="_blank">VUN</a> ETF tracks essentially the entire US stock market, with an index including companies of different sizes and from all sectors. It holds a little more than 3500 individual stocks.<br />
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Some ETFs hold bonds, with a common example being the Vanguard <a href="https://www.vanguardcanada.ca/individual/mvc/detail/etf/overview?portId=9552&assetCode=BOND##overview" target="_blank">VAB</a> ETF, which invests in high quality government and corporate Canadian bonds with a variety of durations.<br />
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<h3>
Comparison</h3>
As the above demonstrates some ETFs and mutual funds will hold very similar products, although in general more mutual funds are active, in the sense of not simply tracking an entire stock exchange index. They have a lot in common, in that they both hold a number of products, usually at least 50 and often thousands of individual stocks.<br />
<ul>
<li><b>How bought/sold</b>: ETFs are bought and sold on a stock exchange, while mutual funds can be bought and sold without a brokerage account. You sell ETF's in terms of number of units, while you redeem mutual funds in dollar amounts generally.</li>
<li><b>Price</b>: The price of a mutual fund is set once a business day (at end normally), and you redeem or purchase at this price in dollar units (there is usually some minimum price). The cost of an ETF will, like a stock, go up and down throughout the day. </li>
<li><b>Guarantee/Risk</b>: There is no guarantee on the value of either a mutual fund or an ETF. These are not like investment bank accounts and GICs and they do carry risk that you can lose principal value. The amount of risk depends on what the holdings are in the ETF or mutual fund, rather than one being in general more risky than the other.</li>
<li><b>Costs</b>: We will explore this in more detail in a future post, but in general the annual management costs will be lower in ETFs and in mutual funds. However, there will be a per transaction cost so when you buy and sell ETFs there will be this additional cost (there are exceptions we will explore in future columns). In general it does not make sense to do frequent trading in small amounts of an ETF due to these costs.</li>
<li><b>Transparency</b>: In general both products are transparent regarding holdings, past performance, etc., although the situation is most clear for ETFs that track an index.</li>
<li><b>Reinvestment</b>: Normally ETFs will offer a DRIP option to reinvest dividends in additional units, if that is your wish, and normally mutual funds can be set up similarly if desired.</li>
<li><b>Name</b>: Most ETFs have a three letter stock exchange designation, such as VAB or XIC, while in general mutual funds have a combination of letters and numbers in a longer name such as RBF1950, with the first letters designating the mutual fund company (RBF means Royal Bank Fund, who handle PH&N funds now) and the latter part being the number of the actual mutual fund.</li>
</ul>
<div>
<i>This posting is intended for education only. The reader is responsible for their own financial decisions. The writer is not a financial planner and reading this column should not be interpreted as obtaining individual financial planning advice. For major financial decisions it is always wise to consult skilled financial professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></div>
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<i>Disclosure: The author of this column holds funds in the mutual fund (RBF1950) and all ETFs mentioned in this column (XIC, VUN, VAB).</i></div>
Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0tag:blogger.com,1999:blog-7100356854525015128.post-35331392335982637032017-01-02T21:59:00.006-08:002018-08-03T13:16:09.176-07:00A Garden of Funds<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCjwavideUiOhdAAQwayvBX1GfOa3v3qtZMzB8Hp_tTUeb6z79NHeJmgtUuEQN91eg7Cz1iul7NtaggxC8FEkcW6ZlQzjsl2yvPc1rOFBIEUJMMEJau9M0qmAMKy77k1XmJ4EMmwyXbIg/s1600/vegetables_pixabay.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCjwavideUiOhdAAQwayvBX1GfOa3v3qtZMzB8Hp_tTUeb6z79NHeJmgtUuEQN91eg7Cz1iul7NtaggxC8FEkcW6ZlQzjsl2yvPc1rOFBIEUJMMEJau9M0qmAMKy77k1XmJ4EMmwyXbIg/s200/vegetables_pixabay.png" width="195" /></a></div>
Think of your investments as a garden. You hope it will flourish and grow. It probably contains at least a few types of vegetables (funds). Just as it is important to choose vegetable varieties relevant to your climate and soil, a good choice of funds for you is determined by your personal situation.<br />
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While a few people hire a gardener to do the work of maintaining their garden, most they take care of the garden themselves. While at times this can seem drudgery, most of the time gardening is rewarding.<br />
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We feel the same is true for investments: most people are capable, with a bit of research and education, of making good investment decisions. While occasional advice from a professional financial advisor is always wise, we feel that <i>you should feel in charge of your own investments</i>.<br />
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Ultimately better decisions are made when you have educated yourself financially. The effort that we plan to put into this blog, and associated Twitter account, is based on the belief that investment education is important. We will not offer formal investment advice, and urge you to seek appropriate financial planning and investment advice, but we do hope to contribute to your investment education.<br />
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In the same way that sometimes a garden will perform beyond your expectations, sometimes an unforeseen event like a drought or severe storm will cause unpredicted damage to your investments. Part of feeling in charge of your own investments is to be emotionally ready for the unexpected.<br />
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Having diversification, a collection of different types of investments, will help you weather financial storms, in the same way that not growing only a single crop will make it less likely that you have a disastrous gardening season.<br />
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In my children, and now in my grandchildren, I see their joy when growing vegetables themselves. Feeling empowered to understand and grow your own investments can be positive. Let's learn together.<br />
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<span style="font-size: x-small;"><i>This posting is intended for education only. The reader is responsible for their own financial decisions. The writer is not a financial planner and reading this column should not be interpreted as obtaining individual financial planning advice. For major financial decisions it is always wise to consult skilled financial professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.</i></span><br />
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<br />Dr. Robert Hawkeshttp://www.blogger.com/profile/10472113163190184489noreply@blogger.com0