"Ask yourself the question 'Am I adding another fund to diversify my stock market investment, or am I adding another index fund to outperform it?'."


- Bill Schultheis, author of The New Coffee House Investor, on adding additional mutual funds to your portfolio.  Your goal when indexing is to approximate the stock market average while diversifying enough to minimize the volatility, not to try and beat it.

The Behavior of Indexes Post-2000

It seems like everybody that isn't on Wall Street is an advocate of index funds.  Reasons often include the low MERs, the average performance that beats the active investors, and the consistent rise in the indexes over time. Even I  have invested in the indexes because of this advice, and I don't plan to change that fact any time soon.

But as I am reading this book, "The New Coffeehouse Investor" by Bill Schultheis, which was originally written in the 1990s, I am beginning to wonder if indexes have had enough time to show their true nature.

Now I am obviously very new at this, so my thoughts could be way off base, but the conjecture is interesting none the less.

The S&P 500 was first published in 1957.  Up until the turn of the 21st century, there wasn't a single 10 year period where investors would lose money.  The chart on Morningstar.com for the S&P clearly shows this for the years prior to 2000:

However, if we add in the years post-2000, we see a very different picture:

Unlike the first chart, there are several places that face a drop in value after 10 years post-2000.  Of course, with the 2008 recession this is understandable, but there were also significant recessions before the year 2000, yet the impact they had on the chart seems negligible. Why is it so much more volatile now?  Is the index old enough to make judgments of its typical performance?  It almost seems like its behavior has changed after the year 2000.

This change in behavior is especially important for asset allocation, as if the indexes have become more volatile then perhaps some people who are more averse to risk won't want to fill their portfolios with them.

Perhaps there is a rational explanation, or maybe these seemingly radical up and downs will just end up being little blips in future performance charts of the S&P 500.  Either way, I am very interested in why this has changed, and what the implications are.

I'm not sure if it is as significant as I am making it seem, but it is definitely something to think about.

Review: Rob Carrick's Guide to what's Good Bad and Downright Awful in Canadian Investments Today

I have a very long to-read list.  It seems like every time I finish a book, I find five others that I know I have to read eventually.  So when I found this book online it was probably the 20th in my list, accompanied by some very big titles that have been unanimously well received.  But I'm just a sucker for Canadian investing.  So much so, that when I was browsing my local Chapters and found that the only copy they carried had a coffee stain on the cover, I drove to the closest one that had it in stock and picked it up.

I'm actually very glad I did.

The book is less of a textbook and more of a reference to investing.  It is laid out in a list formation, which is actually fantastic, and guides you through mutual funds, the stock market, bonds, and pretty much every other topic you've probably seen in this kind of book. The real difference is that in most books, I find that you learn some great strategies but in the end you aren't really sure what specifically to invest in. For example, I have learned about the advantages of having small and medium-cap funds in your portfolio, and yet I have no idea which specific funds are available to me, much less which will nicely round out my investments. 

In Rob Carrick's Guide, the lists are so specific that everything you read about is relevant to your own investments.  Here are some examples:

• "Five big, fat mutual fund industry rip-offs"
• "Five good socially responsible funds"
• "Five essential ETFs
• "Three low-cost ways to buy stocks"
• "Three online resources that do-it-yourself investors should certainly use"
• "Ten traits of a good adviser"

...and so many more.  Now don't get the wrong impression by the word 'list'.  Although that is how the sections are organized,  each one of these lists contains vital information written concisely enough that you are not bogged down by technical jargon, but still come away with advice that you can put to use right away.  The format makes it extremely easy to jump back to a section and quickly pick out the information you are looking for, without having to dive into long-winded paragraphs.  Let's break it down.

Pros

• The lists are fantastic; great advice for whatever topic you are thinking about, whenever you need it.
• The no-nonsense tone.  If something is bad, Rob Carrick will call it bad and tell you why.  If something is great, you will no doubt understand why he feels that way.  It's written in a very accessible way; there is definitely personality in these pages
• Lists, lists, lists!  Again, the index will take you wherever you want to go.
• The breadth of knowledge and experience of Carrick reinforces everything he says.  I haven't invested in any specific sectors, but he has and you can read all about them and why you might consider it.

Cons

• I can literally think of no cons.

Conclusion

Like the title suggests, this book is a guide.  If pure interest is your primary reason for reading the book, you will definitely pick up some great information.  However, I think the real value comes from the fact that no matter what I decide to do with my investment portfolio, I know there is a section about it in this book that will take me right where I want to go.  Want to venture into the stock market? the top brokerages, dividend stocks, and some great advice are all in here.  How about adding some corporate bonds to your portfolio? Here are three easy ways to do so.  Want to try do-it-yourself investing? There are two great lists about discount brokerages and the best resources online to benefit from.  I could go on.  

No matter what type of investment you are interested in, there is something to learn hidden in this guide.  I can already tell that I will be reading over these pages in the future as my portfolio evolves, and the value in that is worth way more than  the cost of any book.

Tip: Rebalancing your Portfolio

One of the most important parts of your investment portfolio is the crafting of an appropriate asset allocation plan that suits your particular situation based on your age, risk aversion, time horizon, and so on. This plan will create a structure for your portfolio and guide how you divide your contributions between investments. However, the weighting of your assets will change over time, which can be seen through the following example.

If you are properly diversified but are interested in a particular sector, you might have a portfolio like this:

• Diversified Stocks 40%
• Sector Specific Stock 20%
• Bonds 30%
• Cash 10%

The diversified stocks may further be divided into small-cap, medium-cap, and large-cap, or they may be made up of a few index funds invested in several markets, but for this example we'll keep it general.

Now, let's say you are heavily invested in the technology sector, which has just surged in stock price. This increase in value has altered your portfolio to look like this:

• Diversified Stocks 35%
• Sector Specific Stock 35%
• Bonds 25%
• Cash 5%

This might seem like a good thing; a large part of your portfolio has increased in value! However, if you compare this to the original asset allocation plan, it is quite different. To make up for this discrepancy, it is wise to sell some of the sector specific stock until the proper percentages are restored.

The same works when the weighting of an asset decreases in your portfolio. In this case, you will want to buy more of it to make up the lost value and keep your allocation as close to the plan as possible. As a rule of thumb,  it is recommended that if any instrument goes above or below it's allocation by 5% it should be rebalanced by either buying or selling.

In general, your asset allocation was created to suit your individual needs, based mainly on the time horizon for your investment and your risk aversion. If you cannot handle the ups and downs of the stock market, it is not wise to allow their weight increase relative to your other investments. Additionally, if a large part of your portfolio has become stocks and you are nearing retirement age, your investments may be much more volatile than you would like at such an age where time is not on your side.

The benefits may be more obvious if you consider the .com bubble at the turn of the century. At the time, many peoples portfolio were filled with technology stocks that were constantly growing in value and making up the bulk of their total investment. When the bubble burst, the ones who did not rebalance their portfolio saw a drastic decrease in their portfolio value, while those who did minimized the damages.

In the end, rebalancing will allow you to have a plan that you can stick to, but also avoid risking your investment when there is an impending bear market.  It is therefore a vital practice for those who have decided on a buy-and-hold strategy.

The "So-Called" Experts Part V: My Frustrations with Investment Advisors

In an ideal world, your investment advisor would treat your portfolios performance as top priority, giving you every advantage that they can, and take a small cut for themselves for their efforts.  However, as is so often the case, the world is not perfect and often the latter is true, but the former too frequently lies in a somewhat grey area.

The problem with advisors and something like a mutual fund is that the higher the MER, the more the manager gets paid.  Of course if the MER is too high, you can skip right along and pick another mutual fund to invest in because you are a savvy investor.  But I would argue that most people aren't.  Those who are uncomfortable with making decisions will trust their advisor to choose for them. They are professionals aren't they?  It is this group of people that is most susceptible to buying into sales pitches such as "great past performance" to make up for the higher MERs, and it's their advisor that tricked them into it.

I have read about this in a few books that I've picked up, and heard about it through others online, but actually experienced it for the first time when I was trying to set up my e-Series account.  The advisor at TD was persisting on a TD Dividend Growth mutual fund with an MER of just under 2%.  Despite my resistance, she continued to point out it's great return average of 6%.  At this point I well understood the benefits of index funds over actively managed funds, so I politely declined.  I still found it frustrating that they have this great e-Series fund account with MERs below 0.5%, and yet they never recommend them to anybody.

I'm not the only one who had this problem with TD.  If you take a quick look online for the experiences people have had, it ranges from pure ignorance of the advisors about the existence of an e-Series account, to extreme arrogance from the managers about how it is a terrible investment and you are a fool for not investing in their actively managed mutual funds.

It's unfortunate, but as I mentioned in a previous post anybody can call themselves an investment advisor or analyst, so the person you are working with may not be as devoted to your portfolios long term growth as someone that holds a Certified Financial Planner designation might be.

This obviously does not apply to every advisor.  I'm sure many of them take their job very seriously and get great satisfaction out of doing the best job for their clients, but it is definitely something to look out for.  I would recommend picking up a few books and going into your advisors office with some understanding of what you are investing in so that you can have a discussion with them, rather than blindly taking their advice.  

Who knows, you might end up realizing you are capable of managing your investments alone.

Vanguard Launches in Canada!

Known for their extremely low mutual fund fees, John Bogle’s legacy is now launching in Canada! This will definitely create some great new opportunities for investors, and hopefully even drive down Canada’s relatively high MERs.  So excited!


You can read the press release here

Milestone I: Finally, My First Investment!

It has been just over two months since I started this blog, and honestly it seems like a lot longer than that.  Starting off with practically zero knowledge of investing, it was a very daunting task to sort through all of the investment vehicles that are available, especially when the wrong choice can tear through your savings account.  But with the help of some good books and great advice from a few investing veterans I have broken the first barrier.

I am very excited to say that I am finally an official investor! I have invested in the TD e-Series funds, which you can read about here, and I am confident this is a strong decision.  It feels amazing to have made real progress, especially after how uphill the task seemed not too long ago.

This is the final asset allocation I have decided on.  You may notice a lack of small or medium-cap funds, but the e-Series is slightly limited on selection.  It’s somewhat of a loss, but for now the low MERs more than make up for it.

TD CDN Index-e (S&P/TSX Composite) 30%

TD US Index-e (S&P 500) 25%

TD International Index-e (MSCI EAFE) 25%

TD CDN Bond Index-e (DEX Universe Bond) 20%

There we have it.  I will be adding money to these funds every month, and re-balancing when any fund gets +/- 5% of it’s original allocation (I will talk about re-balancing in an upcoming post).

Any questions?

Project Part V: How and Why I Opened a TD e-Series Fund Account

Finally, after much deliberating, lots of hoop jumping, and plenty of patience, my investment account is open.  I have decided on the TD e-Series account, which you can read about here

Basically, the account allows you to invest in a handful of index funds online rather than in the branch.  The major perk of this is that the management expense ratios (MERs) are significantly lower than the Investor Series equivalent.  The highest MER is 0.52 and in general they are about 0.50 lower than what you would otherwise be able to get.  You can read the comparisons here.  As you can see, there aren’t too many indexes to invest in - a noticeable absence is a small-cap fund - but it is a good start for a new investor.

One of the main criticisms about mutual funds is that you can purchase ETFs instead, which follow the same indexes but trade like stocks and have much lower MERs.  However, because they have to be purchased through brokers, there are other fees to consider.  In general though, it is believed that the lower MERs make up for the broker fees, making them more desirable than traditional mutual funds.

This is one of the points expressed in Rob Carrick’s Guide to Canadian Investments (which I highly recommend, by the way.  Review coming soon.) However, he goes on to say that one exception is the TD e-Series funds. Because of the extremely low MERs, the difference between them and an ETF with broker fees is minimal, and therefore it is up to the individuals’ preference.

How to open the account

The e-Series account is obviously a gem of an investment.  Unfortunately, it isn’t the easiest account to set up.  In fact, if you go in branch to set it up, most employees will not know what an e-Series fund is, and the ones that do will dismiss it as a poor choice (probably due to the fact that low MERs lead to less profits for them) and it won’t be a pleasant experience.  So after reading advice from around the internet, here is what I did.

1. Your account will have to be registered for TD Easyweb.  Go into the branch and ask to set it up, they will give you a temporary password which you will have to change in 24 hours.  It’s very easy, and easyweb is invaluable for banking convenience.
2. I set up a Mutual Fund TFSA.  This can be done in the branch, and it takes about 30 minutes.  You have to go through and answer a bunch of questions about your risk tolerance and investment expertise, which will result in them giving you a recommended mutual fund.  You should tell the agent that you simply want to open the account, and you don’t want to buy anything at this point.  After a day or two the account should show up in Easyweb.
3. You will want to visit this page, click the “Convert an Account” button, and fill out the form.  It requires an original signature, so print it out, sign it, and mail it to the required address.  After they receive the mail, it takes a few business days to go through.  You will know your account has been converted to an e-Series account when the number “2378” is before your Mutual Fund TFSA number on Easyweb.
4. When you see this number, call the TD mutual fund department and explain that you want to purchase your first e-series funds.  For some reason, I was told that you have to purchase your first funds over the phone.  After that, you can do everything online yourself.  It will take about a day to make the purchase go through.

And then you’re done! There are a lot of hoops you have to jump through, but in the end you get access to funds that will give you superior returns than the traditional Investment Fund.

Thankfully I read a lot of advice regarding setting up the account before I tried myself, and hopefully this guide will help others in the same way.

Review: The Big Secret for the Small Investor

As I became more knowledgeable on the basics of investing, especially index fund investing, I thought I would pick up a book that had a different approach to broaden my perspective.  Although I tend to dismiss books that advertise having a “secret” that changes everything and will put you ahead of the game, the author if this one had written some well received books in the past, so I thought I would give it a shot.

The book begins by explaining the inferior performance of the major index funds (as expressed in my previous post) and then discusses how we can make changes in our strategy to gain better returns.  The author takes the approach that we should buy things that have greater intrinsic value than what we are paying for them, which occurs because of the emotions of investors.  This is actually the basis of value investing.  However, to do this we must be able to discern the value of a stock, and he makes it very clear that it is extremely difficult to do even for professionals.  The authors’ “big secret” is to invest in something called a value-weighted index, which takes advantage of the fact that emotions often over/under-estimate the value of a stock, and picks companies that are expected to under-perform in the future.  When the stock values bounce back to reflect their actual value, the index wins.

I almost feel like I should have a spoiler tag on this post, because this book reads much like fiction in that the whole book is leading you to the final “secret”, which is only talked about for maybe 20 pages.  Although it somewhat seemed like the rest of the book was filler, it provided good information about the difficulties in valuing stocks, the drawbacks of capitalization-weighted stocks, and the other index options out there.  The tone was very informal, which was good in a way because it was easy to read, but also a tad disappointing in terms of being a challenge; the book is filled with anecdotes that help relate the lessons the author learned in his life to investing, but again this feels like wasted space that could have been used for more rigorous material.

Pros:

• A good introduction to value-investing.  The information leading up to the final secret helps you understand why this approach is difficult, and some easier ways to go about it
• A short read.  At under 150 pages with big text, the lack of rigor can be excused by how fast you can learn the the main points of the book and move on
• The informal tone makes it very easy to read, which is refreshing after reading textbooks all day

Cons:

• It is only an introduction to value investing, there is a lot more to be learned from more definitive sources
• The informal tone gets annoying when I am ready to learn a lot of material but am presented with stories and something resembling a conversation instead

Conclusion:

All in all, every con for this book could be seen as a pro, depending on your perspective.  If you want an introductory book to value investing that isn’t intimidating, it is the book for you.  If you want a more thorough guide than you might want to skip it and look for something else.  For me, the quick read was definitely worth it if only just to broaden my horizons about what strategies are out there and the benefits they have over what I am doing.  Especially for my project, perspective is always a good thing.

Value Investing and the Disadvantage of the Major Index Funds

If you’ve been following along so far, you surely have noted the influence I’ve received toward no-load index fund investing.  Everything I read suggests this strategy for the majority of investors, with names such as Warren Buffet and Jack Bogle lending their wisdom.  There are however a certain group of people, known as value investors, that note an inherent flaw with how the big index funds, like the S&P 500, are structured.  Before you dismiss this group of investors you should understand that the father of value investing, Benjamin Graham, wrote what is now often referred to as “the bible for anyone serious about investing.”  He was also the teacher of Warren Buffet.

That’s right, Warren Buffet, who I have quoted as stating that the majority of people will gain the most from index funds, does not actually feel this is the best sort of investment.  Warren Buffet is a value investor.  Now before you call shenanigans,  I believe the reason he is quoted being pro-index funds is that it is a very simple way of investing that requires very little committed time.  Therefore, for the majority of people, it is the ideal investment vehicle.  That doesn’t mean it will produce the best returns, but it is most appropriate considering the lifestyle of the masses.

So what is this flaw in the big index funds?

The S&P 500, Russell 1000, the NASDAQ Composite, are all known as Capitalization-weighted Indexes.  This means that each stock in the index is not weighted equally, but rather based on how large their market capitalization is.  In effect, the largest twenty companies in the S&P 500 only account for 4% of the number of companies, but represent about one third of the market value of the index.  Therefore, the index is influenced much more by any of these twenty companies than by any of the other 480.

In fact, the indexes are efficient in that the weighting of any company will automatically increase when their stock price increases, and the weighting will decrease when the stock price drops.

But why can this be bad?

By now we understand that the price of a stock doesn’t always reflect the actual value of that stock.  In fact, it often represents the emotions of the investors more than the value.  You may have put two and two together that when these over-valued stocks increase in price due to hype or emotions, their weighting in the capitalization-weighted indexes rise.  The index is then faced with greater influence by these overpriced stocks.  If you were invested in the NASDAQ bubble in 2000, I don’t have to tell you why this is a problem.  How well does an index that is full of over priced internet stocks do when the bubble bursts?  Only now is the NASDAQ recovering to it’s original value, and that’s more than 10 years later.

By their structure, the S&P 500, Russel 1000, the NASDAQ Composite, etc. will be composed of more over priced stocks and less under priced stocks, and will therefore be innately inferior.

Instead, value investors suggest that you buy shares that appear under priced, or in other words are priced less than their intrinsic value.  This obviously requires much more work and expertise than simply investing in the S&P, which is why it’s probably not the best route for the masses.  However, if done correctly the returns can be much greater, so it is definitely worth a look.

It should be said that not everybody agrees with value investing.  It would be wise to check out some of the criticism on both sides (you can find the basics on Wikipedia) and make up your own mind about what makes sense to you.

If you want to know more about value investing, check out “The Intelligent Investor” by Benjamin Graham, or the book I just read: “The Big Secret for the Small Investor” by Joel Greenblatt or his website

Tip: Protect Yourself from Selling Prematurely by Valuing your Investment Returns by your Initial Investment

We all know that the stock market is volatile, so by definition the value of your portfolio will jump around in the short run.  However, it seems almost human nature to be disappointed when your inflated stock value drops to a reasonable level, even though it is pretty much destined to do so.  This thought process may discourage you and you may be tempted to sell, even though these are just the natural rhythms of the market!

So how can you avoid this error in thinking? Let’s say you initially invested $1000 in a stock that was speculated to grow quickly.  The stock then grew to an overvalued level of $1500 before dipping back to $1200.  Instead of being disappointed that you “lost” $300, by valuing your investment returns by your initial investment you can be reasonably happy that you gained $200.  This type of thinking acknowledges the fact that stock prices often become over/under valued, and encourages you to stay calm when they do.  This mindset is especially important for those who are following a buy & hold strategy, and are hoping on the gradual growth of the market to provide their returns.

Although changing how you think can seem easier said than done, what can help with incorporating this strategy is to check your stock values infrequently.  By setting a comfortable interval for when you check your stocks you can avoid being exposed to the constant ups and downs of the market, and you can appreciate a more realistic value of your portfolio.

By holding onto your stocks through short term fluctuations you can avoid stress, unnecessary fees, and disappointment when the value eventually bounces back.

Review: The Bogleheads Guide to Investing

The Bogleheads Guide was the first book I picked up on personal investing, and I am very happy with that decision.  Let’s break it down.

Pros

• Very readable.  The language used is very clear and casual - they do not over use technical terms and they explain things well enough that I was able to understand everything they were saying with essentially no prior knowledge.
• Concise information.  This book is chalked full of relevant information that is important for both beginners and seasoned investors alike;  I was honestly excited after every chapter at the new topics I had under my belt.
• Fantastic advice.  Not only do they explain the basics of investing, they give very sound advice based on the combined years of experience from the three authors.  I often found myself shocked at the misinformation I believed before reading this book, and I now have a pretty clear idea of the best way to invest to achieve my goals.
• Lots of evidence to back up their facts.  One of the best things about the book was the sources and studies they included in text.  Many of their hard-hitting facts were backed up by several studies that are difficult to dismiss, and incredibly interesting to read.
• At the end of several chapters the authors included a list of quotes by various experts. I found these relevant, interesting, and they reinforced the topics being discussed.  They also provided a good source for further reading.

Cons

• Everything is based on investing in the United States.  This is the only complaint I had; it was the first book I read so I wasn’t confident in what advice would translate well to Canada.

Conclusion

When I chose to start my project by reading this book I had no idea how much I would learn, or even if I would be able to finish it without getting bored.  I can safely say that this book has propelled my interest in investing so much further than I thought was possible.  The sound and practical advice in this book has given me such a rock-solid start on investing that I will judge everything I read from now on by it. 

Instead of feeling lost about investing I am now excited at the level of confidence that I have received from only one book.  If you are even vaguely interested in understanding investments, you owe it to yourself to give The Bogleheads Guide to Investing a try;  I guarantee you will not regret it.

Rating: Highly recommended

Review: Investing for the First Time (Canadian Dollars & Sense)

After I realized that most of what I was reading was based on investing in the United States, I wanted to gain some Canadian perspective.  This was the only book I found at Chapters that was obviously Canadian, so I picked it up for just over $10.  Let’s break it down.

Pros

• Good basics.  Although I am already familiar with them, the very basics are laid out here quite well. 
• Obviously, it’s Canadian! All the theory and examples given are relevant to Canadian investors.  I actually learned some relevant stuff about RSPs and TFSAs, which was nice.

Cons

• Very short.  The whole book is barely 100 pages, so there isn’t much detail on any one subject, and they cover nothing more than the very basics
• No advice.  Although there is theory in these pages, you won’t find any real advice or strategy like presented in the Boglehead’s Guide to Investing
• Felt similar to reading a textbook.  A minor detail, but I didn’t feel like there was a human voice behind the words.  It wasn’t boring or overly technical, but no personality in the least.

Conclusion

I started this book because I had learned a lot from American resources, but wasn’t sure what would apply to Canadian investing as well.  In that regard, the book was useful.  I am now more familiar with the opportunities that us Canadians have, and I feel like I will have an easier time applying advice I read in American books.  However, in the end the book was far too basic.  It is very clear that the content was, as the title suggests, for the first time investor, so maybe I am being too harsh.  But even for an introduction book it does nothing to point someone in the right direction based on the goals they want to achieve.  It’s theory, and that’s all.

Rating: If you are a first time Canadian investor and want to know some basics before trying to figure out a strategy, the quick read might be worth your time, but I’m sure you could do better.

Project Part IV: A Lot of Waiting

A few weeks ago I had a queue nearing 20 posts ready to publish one a day, and no shortage of time to up that number faster than it could drop.  Skip to today and it has been 5 days since my last post.  Yes, summer vacation is over and it is back to school.  Unfortunately that means I have less time to read, resulting in less I have to post about.  On the plus side, I live right across from my TD bank so I have made some progress there!

After waiting for the forms to make it to TD, my TFSA was finally registered and $1000 was deposited as an initial investment.  While I did open the account with the idea of putting away money to invest, I figured I would also use the account as a tax-shelter to hold my investments once I started.  Unfortunately, I opened the wrong account.  I opened a “TFSA Savings Account” rather than a “Mutual Fund TFSA”.  Frustrating, but I went over to the TD today and got it switched to the right account without any trouble.

I did not purchase any mutual funds just yet.  Instead, I have made the decision to invest in the “e-series funds” that TD offers.  This is an account where you can purchase mutual funds completely online.  Not only convenient, this also reduces the expense-ratio for the available mutual funds to under 0.5.  You can only invest in index funds, but as that is what I wanted to do to begin with, it is the perfect opportunity.

So my next step is to mail in forms stating that I want to convert my Mutual Fund TFSA to an E-series fund.  It is unfortunate that I have to mail the forms in and jump through hoops by first opening a mutual funds account and then converting it, but I will discuss that frustration in an upcoming post.

Other than that I am saving money consistently, cutting back on unnecessary spending, and taking a Mathematics of Finance course at the University.  I hope I’ll learn some cool stuff from the course, but I guess we’ll see!

Stay tuned.

The "So-Called" Experts Part IV: Think Twice about Trusting Certain Advisors

Although I am a fan of do-it-yourself investing, I’m sure many people would be more comfortable hiring an adviser of some kind to invest their money.  The assumption would be that someone with expertise would have better information and would be able to make better decisions than the individual could.  Some might look for people with titles such as:

• financial analyst
• financial consultant
• financial planner
• investment consultant

If you would automatically put your trust in anyone with one of these titles, DON’T. 

According to the U.S. Securities and Exchange Commission:

“Anyone can use these terms without registering with securities regulators or meeting any educational and experience requirements”

That means anyone can literally print out a business card with their name on it and any one of those titles and be in business.  Scary, isn’t it?  Before reading that, I would have probably taken advice from one of those “professionals” with more weight than it would deserve.

So who can you trust?

I accept that some people are more comfortable with an adviser handling their investments.  If that is you, try looking into hiring someone with the title:

• Chartered Financial Adviser (CFA)

• Certified Financial Planner (CFP)

Both of these titles require significant training and completion of intense comprehensive exams.  In particular, the CFP must master over 100 financial planning topics, and the CFA must have 750 hours of study and pass three exams.

In general it is a good idea to ask a potential adviser what they’re qualifications are, what they studied in school, and what related work experience they have had.  If they’re answers don’t make you comfortable enough to let them handle your money, look for another; there are plenty of well qualified advisers out there.

"Buy and hold is a dull strategy.  It has only one little advantage - it works, very profitably and very consistently.

- Frank Armstrong, author of The Informed Investor

The "So-Called" Experts Part III

“From 1982 through 2006, top economists in the United States were polled for their interest rate forecasts.  The experts were correct in identifying the DIRECTION that the interest rate would move only 1/3 of the time; they were better off guessing.”

FINANCIAL CONSUMER AGENCY OF CANADA

Contains interactive tools that help you do things such as choose the best chequing and savings account, decide on a credit card, manage your budget, and more.  Also check out their Publications section for useful information on topics from investments to fraud.

"I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two."


- Warren Buffet

The "So-Called" Experts Part II

“From 2001 to 2006, managed funds underperformed their index in all 9 style box categories.”

"There is simply no way under the sun to forecast a fund's future returns based on its past record."


- Jack Bogle, Founder of the Vanguard Group

Tip: Don't Judge a Mutual Fund by it's Rating

The first thing I did when I started gaining interest in mutual funds was Google the top funds in Canada.  I arrived at the Globe and Mail 5-star Report on mutual funds and immediately thought to myself how easy it would be to choose a successful investment; just look at the rating and pick the best one.

Good thing I decided to save money and read a few books before I invested in something.

A 5-star rating does not predict success

In fact, in 2004 Mark Hulbert wrote in Forbes Magazine stating that the average growth of the top funds on Morningstar in the past decade was 5.7%, compared to 10.3% for the Wilshire 5000 Index Fund.

Additionally, a study by Barksdale and Green on 144 institutional equity portfolios from 1975 to 1989 found that the portfolios that finished in the top 20% in the first five years were the least likely to finish in the top half in the last five years.

Morningstar even states on their website that these ratings shouldn’t be used to predict future performance.

So why do these ratings even exist?

Because people believe them.  Although the government requires by law that a statement must be made about the lack of correlation between ratings and future performance, the 5-star funds are still advertised like buying into them provides guaranteed returns.

I’m not saying that these ratings don’t provide any useful information. The Globe and Mail website states that historically, on average, their top rated funds do better than the others over a six month to two year period.  Whether you want to believe that or not is up to you; what is important to remember is that it if you are going to take the rating into account, it should not be the only, or even the major, indicator of performance that you consider.  Instead, factors that influence cost, such as the expense ratio, can provide real information about what will happen to the money you invest into a particular fund.

In reality you should never make an investing decision based on one factor, but this is especially true for fund ratings.  Do your homework, read the prospectus, and make wise decisions based on facts with some inherent value.

Tip: Be Smart with Taxes

Not all of your investments can be made in a tax-free account.  Minimize the damage taxes can do by placing heavily taxed funds (ie. bond funds) in a retirement account, and the tax-friendly funds (ie. a tax-efficient index fund) in a taxable account.

The "So-Called" Experts Part I

“From 1995 to 2004 the average expert-picked stocks grew 8% annually.  The Market Index grew 9.5%”

2010-2011 Guide to RRSPs

Few people are taking advantage of their RRSPs; read this and don't be one of them!

"The expense ratio is the only reliable predictor of future mutual fund performance."


- A study by the Financial Research Corporation

Tip: Be Wary of Turnover

When deciding which fund to invest in, make sure you take a look at the turnover rate on the prospectus.  High turnover results in high costs which are correlated with a lower return.  The Bogleheads estimate that costs due to turnover equate to about 1% of the turnover rate, and as we know any extra cost you incur comes right out of your investment.

Another reason you should always read the prospectus!

Morningstar.ca Investing Resources

Canadian guides on mutual funds, portfolios, stocks, ETFs, and more!

"Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals."


- Warren Buffet

Tip: Fees and Mutual Funds

Keep costs as low as possible when investing in mutual funds; the general idea that the more we pay the more we receive does not apply in this case.  Every dollar spent on fees is one less received by you.

Here is an example from the Bogleheads Guide to Investing:

If I start investing $3500 a year at the age of 25 until the age of 65, with the long-term stock return average of 10.5%, I would accumulate $1,961,795.  If I continued to invest that money at the same rate past the age of 65, I would receive an average annual income of about $200,000.  Of course you aren't guaranteed these returns, but let's assume you are just for comparisons sake.

However, let’s say I invest the same amount but have only a 7.2% return due to 3.3% annual costs.  At the age of 65 my investment would be worth $788,745. This would result in an average annual income of  $56,790 past the age of 65.  That is less than half the total value and less than a third of the average annual return!

A cost of 3.3% per year is the difference between living in luxury making an average of $200,000 a year, and getting by on $56,000 a year during retirement.  You can see why keeping costs low is extremely important.

Focusing on what's Relevant: Canadian Investing

There is an incredible amount of information out there on investing, so much in fact that it is hard to narrow down what is relevant.  The other day I went to my local Chapters to get a glimpse of the resources that were out there, and I was reminded of something I had thought about once before.  A lot, and I mean the majority, of the resources I found were based on American investing.  This probably isn’t a problem for the more seasoned investors out there who can probably take the most important messages of the books and apply them to the equivalent opportunities available on Canada.  However, for someone just starting out it can be difficult to distinguish between what is relevant for Canadian investing, and what is only available in the United States.

For example, in the Bogleheads Guide to Investing they often suggest maxing out Roth IRA funds.  I was beginning to wrap my head around the concept of IRA’s when I realized these plans are specific to the United States.  Of course this is just a retirement plan so I am guessing that a Canadian RRSP is similar, but what if there are minute differences that make all the difference when making investing decisions?  Should I follow the advice about IRAs and just apply them to RRSPs? What concerns me is that I don’t know, and I’m sure this isn’t the only case.

So while the best and most reputable books are on American investing, I feel that I should supplement them with some Canadian resources.  I purchased one of the only Canadian-specific guides available at chapters (a whopping 90 pages long), and I am hoping it will give me some perspective on what is relevant to me.

I have also decided that if I find any good Canadian resources, I will post them with a unique tag or title so they are easy to find.  I’m sure I’m not the only one with this problem, so I think a solid list of Canadian references would be beneficial for everyone.