HOW MUCH TO SPEND WHILE RETIRED = STRESS AND CONFUSION

HOW MUCH TO SPEND WHILE RETIRED = STRESS AND CONFUSION

Fred Vettese, chief actuary of Morneau Shepell has written another piece in Benefits Canada that talks about the decumulation phase of  retirement. That is, when you start to spend down your retirement savings.  It can be a very stressful time for people who worry constantly about outliving their money.  This leads many to be overly anxious and probably spend less than possible.

http://www.benefitscanada.com/pensions/governance-law/employers-and-government-need-to-step-up-to-address-decumulation-dilemma-92539

Employers, government must step up to address decumulation dilemma

Fred Vettese | January 13, 2017

It’s a little shocking to realize that 1,100 Canadians are turning 65 every day. Of that number, about 500 will be relying on their own savings for much of their retirement income security (the rest are defined benefit participants or low-income workers). Unfortunately, very few of them are qualified to implement an efficient decumulation strategy on their own. The simple reason is that decumulation is a lot more complicated than it looks.

A 65-year-old couple with $500,000 in tax-sheltered savings could do everything right (if adhering to orthodox retirement planning principles is deemed to be right) and still run out of money by age 75. Alternatively, they could have used a more modern decumulation strategy – one only academics and a select group of actuaries seem to be aware of – and have enough money to live comfortably into their 90s, even if their investment results were no better.

Of course, retirees can and do seek out help from financial advisors but judging from the emails I receive from readers that might not be doing them much good. The interests of commission-based advisors are not well aligned with those of retirees. It’s not just a matter of which investment funds an advisor might recommend (each fund pays a different trailer fee), it’s also a question of whether the advisor is ready to recommend certain risk-mitigation strategies that will drastically reduce his or her compensation going forward.

Two major stakeholders have the ability to help new retirees but have done little so far. One of them is employers that sponsor capital accumulation plans. I suggested to my insurance company friends that we should mobilize this group to do more. They told me this would be a challenge since few employers want to remain involved with plan participants once they’ve retired, preferring instead to see retiring participants transfer their monies out of workplace plans as soon as possible. This is a shame because employers can provide low-cost decumulation options within their plans. Moreover, they have ready access to objective retirement experts who can devise more effective decumulation strategies.

It should be noted that virtually all such employers are companies in the private sector, companies that should remember why they sponsor a pension plan or group registered retirement savings plan in the first place. Most of them want to see their employees retire with dignity, not only because it’s the right thing to do but also because it sends a signal to the active workforce that the company they work for is a good one and deserves their loyalty.

In addition, these companies want to be seen as good corporate citizens because a good public image is good for business. Given this rationale, how does it make sense to support participants in defined contribution pensions during a savings accumulation marathon that can last for 30 years or longer, only to drop them just before they reach the finish line? It’s not good for anyone to see a retiree run out of money at age 75.

The other stakeholder that needs to step up is government. Three provinces still do not allow in-plan decumulation. Notably, Ontario is one of them, which is surprising given its very public concern for the retirement security of Ontarians and given that about 200 of those 500 daily retirees live in the province. To my knowledge, the question of allowing in-plan decumulation is not even on Ontario’s radar at present, even though the government had circulated a consultation paper on the subject a couple of years ago (and which now appears to be gathering dust).

What’s worse, the existing maximum withdrawal rules for defined contribution pension plans may be doing more harm than good in that those rules would preclude some of the more effective decumulation strategies. That particular problem is shared by all provinces.

I should acknowledge that even poor decumulation strategies work fairly well as long as capital markets do well. With the current bull market approaching a record in terms of length, however, that may change sooner rather than later. I have to wonder how many more participants of defined contribution pension plans have to retire with a sub-optimal decumulation strategy before action is taken.

DON’T BUY INDIVIDUAL STOCKS UNLESS YOU’RE WILLING TO DO THIS!

DON’T BUY INDIVIDUAL STOCKS UNLESS YOU’RE WILLING TO DO THIS!

What is “this” that you need to do if you plan on playing the market with anything besides low cost index funds?

“This” is to create a spreadsheet that keeps track of your stock performance relative to the index. I am willing to bet that 95%+ of small investors have no idea whether their stock picks have turned out better or worse than buying the whole index.   They may remember those stocks that doubled but forget the ones that lost 50%.  Or, they forget what they paid for a stock or how long they’ve held it.

How can someone possible know whether they’d be better off buying the whole index if they don’t keep detailed records of how their picks have performed?  If you’re not willing to invest the time and effort, then stick to the index.

Here is what I’ve done and I ‘ll be completely honest with how I’ve fared vs. the index since I paid off the mortgage and finally started to have some money to invest in 2009.

I developed a spreadsheet in Microsoft Excel that records any stock purchases I’ve made including the date of purchase, the dividend yield and the total cost.  Beneath this line, I created similar equations but this time assuming I spend the exact amount of money buying the whole Canadian market.  For this, I use the Ishares XIC index fund.

To finish off the spreadsheet, I created formulas that determine the compound annual growth rate for the my picks vs the whole Canadian market including dividends.

Finally, I compare my performance vs. the XIC etf for each stock and then for my whole portfolio.

This spreadsheet allows me to see which of my picks are beating the market and which ones are lagging.  I also can see how each stocks has performed since purchasing  and how the whole market has performed.

As I already mentioned, I’ve been at it since 2009 in a significant way.  To date, my picks have bested the XIC index by 19% overall.  So in my case, I have 19% more money in my portfolio today because I bought my own stocks vs investing in the XIC.    Not a bad return but I’ve also taken on more risk by running a concentrated portfolio and I’ve spend many hours reading and learning about companies to help me make my decisions.

In the end, if I didn’t enjoy doing the research, I don’t think I would have invested the time and effort to pick individual stocks.  It’s tough to do well and there are no guarantees you will be better off doing it this way vs. indexing.

Indexing is such an amazing creation.  I can see myself moving more and more to indexing as time passes.  Right now I’ve taken a gamble on some oil and gas stocks looking for a big payoff.  When that does or doesn’t pan out, I may decide to call it quits and go 100% index.

Remember that I have a teacher pension plan with 25 year of service.  If I was responsible for my own retirement money, I would be 100% index funds, no doubt about it.

HOW MUCH TO SPEND WHILE RETIRED = STRESS AND CONFUSION

HOW MUCH TO SPEND WHILE RETIRED = STRESS AND CONFUSION



Fred Vettese, chief actuary of Morneau Shepell has written another piece in Benefits Canada that talks about the decumulation phase of  retirement. That is, when you start to spend down your retirement savings.  It can be a very stressful time for people who worry constantly about outliving their money.  This leads many to be overly anxious and probably spend less than possible.

http://www.benefitscanada.com/pensions/governance-law/employers-and-government-need-to-step-up-to-address-decumulation-dilemma-92539



Employers, government must step up to address decumulation dilemma

Fred Vettese | January 13, 2017

It’s a little shocking to realize that 1,100 Canadians are turning 65 every day. Of that number, about 500 will be relying on their own savings for much of their retirement income security (the rest are defined benefit participants or low-income workers). Unfortunately, very few of them are qualified to implement an efficient decumulation strategy on their own. The simple reason is that decumulation is a lot more complicated than it looks.

A 65-year-old couple with $500,000 in tax-sheltered savings could do everything right (if adhering to orthodox retirement planning principles is deemed to be right) and still run out of money by age 75. Alternatively, they could have used a more modern decumulation strategy – one only academics and a select group of actuaries seem to be aware of – and have enough money to live comfortably into their 90s, even if their investment results were no better.

Of course, retirees can and do seek out help from financial advisors but judging from the emails I receive from readers that might not be doing them much good. The interests of commission-based advisors are not well aligned with those of retirees. It’s not just a matter of which investment funds an advisor might recommend (each fund pays a different trailer fee), it’s also a question of whether the advisor is ready to recommend certain risk-mitigation strategies that will drastically reduce his or her compensation going forward.

Two major stakeholders have the ability to help new retirees but have done little so far. One of them is employers that sponsor capital accumulation plans. I suggested to my insurance company friends that we should mobilize this group to do more. They told me this would be a challenge since few employers want to remain involved with plan participants once they’ve retired, preferring instead to see retiring participants transfer their monies out of workplace plans as soon as possible. This is a shame because employers can provide low-cost decumulation options within their plans. Moreover, they have ready access to objective retirement experts who can devise more effective decumulation strategies.

It should be noted that virtually all such employers are companies in the private sector, companies that should remember why they sponsor a pension plan or group registered retirement savings plan in the first place. Most of them want to see their employees retire with dignity, not only because it’s the right thing to do but also because it sends a signal to the active workforce that the company they work for is a good one and deserves their loyalty.

In addition, these companies want to be seen as good corporate citizens because a good public image is good for business. Given this rationale, how does it make sense to support participants in defined contribution pensions during a savings accumulation marathon that can last for 30 years or longer, only to drop them just before they reach the finish line? It’s not good for anyone to see a retiree run out of money at age 75.

The other stakeholder that needs to step up is government. Three provinces still do not allow in-plan decumulation. Notably, Ontario is one of them, which is surprising given its very public concern for the retirement security of Ontarians and given that about 200 of those 500 daily retirees live in the province. To my knowledge, the question of allowing in-plan decumulation is not even on Ontario’s radar at present, even though the government had circulated a consultation paper on the subject a couple of years ago (and which now appears to be gathering dust).

What’s worse, the existing maximum withdrawal rules for defined contribution pension plans may be doing more harm than good in that those rules would preclude some of the more effective decumulation strategies. That particular problem is shared by all provinces.

I should acknowledge that even poor decumulation strategies work fairly well as long as capital markets do well. With the current bull market approaching a record in terms of length, however, that may change sooner rather than later. I have to wonder how many more participants of defined contribution pension plans have to retire with a sub-optimal decumulation strategy before action is taken.

DON’T BUY INDIVIDUAL STOCKS UNLESS YOU’RE WILLING TO DO THIS!

DON’T BUY INDIVIDUAL STOCKS UNLESS YOU’RE WILLING TO DO THIS!



What is “this” that you need to do if you plan on playing the market with anything besides low cost index funds?

“This” is to create a spreadsheet that keeps track of your stock performance relative to the index. I am willing to bet that 95%+ of small investors have no idea whether their stock picks have turned out better or worse than buying the whole index.   They may remember those stocks that doubled but forget the ones that lost 50%.  Or, they forget what they paid for a stock or how long they’ve held it.

How can someone possible know whether they’d be better off buying the whole index if they don’t keep detailed records of how their picks have performed?  If you’re not willing to invest the time and effort, then stick to the index.

Here is what I’ve done and I ‘ll be completely honest with how I’ve fared vs. the index since I paid off the mortgage and finally started to have some money to invest in 2009.

I developed a spreadsheet in Microsoft Excel that records any stock purchases I’ve made including the date of purchase, the dividend yield and the total cost.  Beneath this line, I created similar equations but this time assuming I spend the exact amount of money buying the whole Canadian market.  For this, I use the Ishares XIC index fund.

To finish off the spreadsheet, I created formulas that determine the compound annual growth rate for the my picks vs the whole Canadian market including dividends.

Finally, I compare my performance vs. the XIC etf for each stock and then for my whole portfolio.

This spreadsheet allows me to see which of my picks are beating the market and which ones are lagging.  I also can see how each stocks has performed since purchasing  and how the whole market has performed.

As I already mentioned, I’ve been at it since 2009 in a significant way.  To date, my picks have bested the XIC index by 19% overall.  So in my case, I have 19% more money in my portfolio today because I bought my own stocks vs investing in the XIC.    Not a bad return but I’ve also taken on more risk by running a concentrated portfolio and I’ve spend many hours reading and learning about companies to help me make my decisions.

In the end, if I didn’t enjoy doing the research, I don’t think I would have invested the time and effort to pick individual stocks.  It’s tough to do well and there are no guarantees you will be better off doing it this way vs. indexing.

Indexing is such an amazing creation.  I can see myself moving more and more to indexing as time passes.  Right now I’ve taken a gamble on some oil and gas stocks looking for a big payoff.  When that does or doesn’t pan out, I may decide to call it quits and go 100% index.

Remember that I have a teacher pension plan with 25 year of service.  If I was responsible for my own retirement money, I would be 100% index funds, no doubt about it.

MUTUAL FUNDS SUCK! MORE EVIDENCE

MUTUAL FUNDS SUCK! MORE EVIDENCE

According to the Globe and Mail,

“Not a single Canadian manager investing in U.S. stocks delivered higher returns than the S&P 500 index over that time (past five years), according to S&P Dow Jones Indices.”

Well that’s America, what about Canada?

“The second quarter saw 17 per cent of Canadian large-cap equity fund managers beat the market, which was the lowest rate of outperformance among data going back to 1999”

Do you need any more proof that buying mutual funds is a bad investment?  It’s all about cost.  Mutual funds with fees of 2-3% can’t compete with low cost index funds.

If you want to be a successful investor, you need to ditch the mutual funds, and learn to DIY.  Buying low cost index funds with an advisor is better than mutual funds but it’s still too expensive.  Paying .5% to 1% for index fund advice is still too high.

Happy investing.

http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/canadian-funds-focused-on-us-stocks-struggle-to-beat-the-index/article32357580/

MUTUAL FUNDS SUCK! MORE EVIDENCE

MUTUAL FUNDS SUCK! MORE EVIDENCE

According to the Globe and Mail,

“Not a single Canadian manager investing in U.S. stocks delivered higher returns than the S&P 500 index over that time (past five years), according to S&P Dow Jones Indices.”

Well that’s America, what about Canada?

“The second quarter saw 17 per cent of Canadian large-cap equity fund managers beat the market, which was the lowest rate of outperformance among data going back to 1999”

Do you need any more proof that buying mutual funds is a bad investment?  It’s all about cost.  Mutual funds with fees of 2-3% can’t compete with low cost index funds.

If you want to be a successful investor, you need to ditch the mutual funds, and learn to DIY.  Buying low cost index funds with an advisor is better than mutual funds but it’s still too expensive.  Paying .5% to 1% for index fund advice is still too high.

Happy investing.

http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/canadian-funds-focused-on-us-stocks-struggle-to-beat-the-index/article32357580/

ROBOTS VS. CANADA PENSION PLAN

ROBOTS VS. CANADA PENSION PLAN



Humans are not robots.  They don’t always make rational decisions.  If you don’t believe this then you probably believe that the federal government’s plan to boost Canada Pension Plan (CPP) contributions and payouts doesn’t make sense.  In a perfectly rational world, Canadians will simply reduce their savings elsewhere to balance out the extra contributions they and their employers will make.

In the real world, there are many Canadians who  have not been saving enough for retirement but will be saving more now because they are forced to do so.  They will have a little more money taken off their pay cheques to pay for this increased saving but they will hardly notice.  I really don’t want to get into the pros and cons of forced savings programs like the CPP because there are actually good arguments on both sides of the debate.

What I’d like to focus on instead is the psychological benefits of knowing that you have a pension waiting for you when you retire and how this can actually make you richer over time.  I will use my own financial situation and my experience teaching CPP to new immigrants as examples to prove my point.

My Experience

As many of you know, I am a teacher and I am obligated to contribute 12.5% of my pay to my pension every year I teach.  In return, I am guaranteed a pension of anywhere from 50-60% of my annual salary, depending on how many years I teach (eg.  25 years of teaching to receive 50% pension).

As a result of knowing this pension is waiting for me and it is being managed by some pretty smart people, I have become more willing to take on more risk with my other investing, have felt confident enough to consume more goods and services than I otherwise would have, and have not panicked and sold my investments in a market downturn.  In fact, I have been a buyer of stocks in every downturn since 2002.  The psychological relief of knowing that my retirement funds are not in jeopardy is huge.

My Teaching Experience

Every year I teach a large group of new immigrants to Canada about CPP and Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).  Almost all my students have low paying jobs and have never heard of any of these programs.  When I ask them what they plan on doing for money when they get older, they have no idea and this causes them stress.  I can see the worry in their eyes because they know how expensive it is to live in a country like Canada (nevertheless, they are so extremely grateful to be here).

Then  I begin explaining each program starting with CPP and ending with GIS with real life calculations that shows what they can expect to earn from these programs starting at age 65.  By the end of the class, there is relief and almost a sense of joy in the class.  They had no idea that by working at even a minimum wage job for 25 or 30 years, they will end up with a decent retirement income.  The knowledge inspires them to go to work and keep working day after day, year after year.  They also understand the value of not working in the underground economy (“for cash”).  That is the value of programs like CPP.

I think boosting CPP payouts will help more people feel less anxiety about growing old.  People cannot stand the unknown.  There are just too many bad things that could happen that can consume our imaginations.  When people are afraid they find ways to reduce their fear like selling stocks in a bear market, keeping more money in cash, and reducing spending on goods and services, etc.  Boosting CPP payments may reduce the urge to make bad investing and spending decisions in times of uncertainty.

EXCHANGE TRADED FUNDS HAVE ONLY A 7% MARKET SHARE IN CANADA

EXCHANGE TRADED FUNDS HAVE ONLY A 7% MARKET SHARE IN CANADA

According to the National Bank of Canada, only 7% of invested monies in Canada find their way into exchange traded funds (etfs).

That means 93% of monies invested by Canadians is still going into high fee mutual funds!  What a depressing start to the week.

To make matters worse, our mutual funds are among the most expensive on the planet with an average annual fee of 2.5%.  I know readers here know how damaging these fees are to the long term health of their retirement savings, but not enough Canadians have figured this out yet.

To compare, in the United States, the market share for etfs is 14% and growing rapidly.   Americans pay much less for mutual funds than we do here in Canada and they’re still deserting them much faster than we are.

So why are Canadians so unconcerned about high fees?  Over and over research tells us that high fees damage returns more than any other factor.  Are Canadians just more gullible to the investment advisor’s smile and hand shake?  Are we too polite to question these fees?   Let’s hope we can get the message out to as many Canadians as possible, especially young people who have the most to lose from high fees and lousy returns.

New ETFs are really mutual funds with a twist.

Unfortunately, the smart men and women on Bay and Wall Street are starting to figure out that the old mutual fund model is in trouble.  So they’ve started creating new products that they call etfs but  act similar to mutual funds, albeit with lower fees   So now we have sector specific etfs, low volitility etfs, covered call etfs, put write etfs, equal weight etfs, long/short etfs, leverage etfs, bull/bear etfs, guru etfs, commodity etfs, etc.  The list never ends.

On the positive side, these new etfs typically have annual fees of 0.65% or less, which is much better than the average 2.5% mutual fund fee. However, the 0.65% is still much higher than the 0.05% fee for Vanguard Canada’s VCN and I haven’t seen any proof that they new funds will do any better or worse than the low cost funds they are meant to replace.

They are also confusing and may push naive investors into the arms of investment advisors who are only too happy to offer advice and guidance to calm our nervous fellow Canadians.  And the cost of this advice? Roughly a 1% annual fee.  Ouch!

0.65% for the etfs, 1% for the advisor and  we’re almost back to the same fee structure as the old mutual fund model.

We all know a better alternative.  Follow a simple DIY strategy of buying a few low cost etfs and keep more of your money.

EXCHANGE TRADED FUNDS HAVE ONLY A 7% MARKET SHARE IN CANADA

EXCHANGE TRADED FUNDS HAVE ONLY A 7% MARKET SHARE IN CANADA


According to the National Bank of Canada, only 7% of invested monies in Canada find their way into exchange traded funds (etfs).

That means 93% of monies invested by Canadians is still going into high fee mutual funds!  What a depressing start to the week.

To make matters worse, our mutual funds are among the most expensive on the planet with an average annual fee of 2.5%.  I know readers here know how damaging these fees are to the long term health of their retirement savings, but not enough Canadians have figured this out yet.

To compare, in the United States, the market share for etfs is 14% and growing rapidly.   Americans pay much less for mutual funds than we do here in Canada and they’re still deserting them much faster than we are.

So why are Canadians so unconcerned about high fees?  Over and over research tells us that high fees damage returns more than any other factor.  Are Canadians just more gullible to the investment advisor’s smile and hand shake?  Are we too polite to question these fees?   Let’s hope we can get the message out to as many Canadians as possible, especially young people who have the most to lose from high fees and lousy returns.

New ETFs are really mutual funds with a twist.

Unfortunately, the smart men and women on Bay and Wall Street are starting to figure out that the old mutual fund model is in trouble.  So they’ve started creating new products that they call etfs but  act similar to mutual funds, albeit with lower fees   So now we have sector specific etfs, low volitility etfs, covered call etfs, put write etfs, equal weight etfs, long/short etfs, leverage etfs, bull/bear etfs, guru etfs, commodity etfs, etc.  The list never ends.

On the positive side, these new etfs typically have annual fees of 0.65% or less, which is much better than the average 2.5% mutual fund fee. However, the 0.65% is still much higher than the 0.05% fee for Vanguard Canada’s VCN and I haven’t seen any proof that they new funds will do any better or worse than the low cost funds they are meant to replace.

They are also confusing and may push naive investors into the arms of investment advisors who are only too happy to offer advice and guidance to calm our nervous fellow Canadians.  And the cost of this advice? Roughly a 1% annual fee.  Ouch!

0.65% for the etfs, 1% for the advisor and  we’re almost back to the same fee structure as the old mutual fund model.

We all know a better alternative.  Follow a simple DIY strategy of buying a few low cost etfs and keep more of your money.

DIVIDEND VS. INDEX INVESTING PART 2

DIVIDEND VS. INDEX INVESTING PART 2

In a previous blog post, I wrote about how successful dividend investing has been in the past 20 years in Canada.  I wanted to provide a little more colour on how dividend investing has performed vs. index investing so I did a little number crunching to see which stocks outperformed the S&P 500 and which did not.  I looked at total returns for 5, 10 and 15 years (assumes you paid no tax and reinvested all dividends back into the companies or index.   The stocks I looked at are all large cap Canadian companies with a long history of paying dividends.  They are fairly concentrated in a few sectors (no health care, technology, consumer staples) but that is the nature of the Canadian market and one reason why I don’t think it was wise to only dividend invest in Canada.

Here is what I found:

5 Year Returns:

S&P 500 (CDN):  11.7%

Companies that beat the S&P 500:  Enbridge, Sun Life, Loblaw, BCE, Metro

Companies that trailed the S&P 500:  All the banks, Fortis, TransCanada Pipeline, Manulife, Power Corp, Imperial Oil, Empire, SNC Lavalin, Riocan, Rogers, Thomson Reuters

10 Year Returns:  S&P 500 (CDN) 6.5%

Companies that beat the S&P 500: Royal Bank, Fortis, TransCanada Pipeline, Enbridge, SNC Lavalin, Riocan, Metro, BCE, Rogers

Companies that trailed the S&P 500: BMO, Manulife, Power Corp, Sun Life, Imperial Oil, Empire, Loblaw, Thomson Reuters

15 Year Returns:  S&P 500 (CDN) 2.9%

Companies that beat the S&P 500:  All the banks, Fortis, TransCanada Pipeline, Enbridge, Power Corp, Sun Life, Imperial Oil, Empire, Loblaws, SNC Lavalin, RioCan, Metro, BCE, Rogers

Companies that trailed the S&P 500:  Manulife, Thomson Reuters

Conclusions:

As time has passed the percentage of companies that beat the S&P 500 has increased.  However, some of the companies who beat the 15 year results of the S&P 500 only did so because of the strength of the Canadian dollar today compared to the past 15 years. This reduced the 15 year performance of the US index by 2.7% (the 5 and 10 year results were not effected much by currency changes).  If you remove the currency boost, you can add Power Corp, Sun Life, Loblaws, and BCE to the  under performed column vs. the US index.

As a compromise, if you insist, you may consider investing your one third Canadian stocks in high quality dividend payers, but keep your one third world stocks in the Vanguard VXC all world index fund.  I still don’t know if dividend investing is going to be so successful for the next 15-20 years if interest rates start to rise again.  We’ve had a fantastic 35 year bull market in government bonds and if rates rise, dividend stocks should become less coveted by income seeking investors.  But that’s a big if.  So far bond rates continue to fall and in some cases are actually negative (Japan, Switzerland and Germany) so what do I know?

WHY BNN DOESN’T HAVE MUTUAL FUND MANAGERS AS GUESTS

WHY BNN DOESN’T HAVE MUTUAL FUND MANAGERS AS GUESTS

Can you guess why?  I’ll give you a hint.  Horrible performance that is easy for viewers to find out about.  Mutual funds must post their performance and there are several places investors can visit to find out exactly how they are doing.  My favourites are morningstar.ca and globefund.com.

Do a quick search next time you hear about some hot mutual fund and you have a roughly 75% chance to find out that the fund you were interested in performs worse than the index it tracks over the long term.

If BNN allows these fund managers on TV, viewers will eventually realize these suits on TV are not worth watching; then we can say bye bye to BNN, even with all the pretty young woman reporters (not a coincidence).

So how does BNN get around this problem?   Choose guests who don’t run mutual funds but rather are wealth or portfolio managers.

Wealth managers don’t run conventional mutual funds and therefore do not have to publicly disclose their performance like mutual funds.  In theory, wealth managers can create individual portfolios to match the goals and risk tolerance of each of their customers.  I guess that’s how they get around the reporting requirement we see with mutual funds.

So if I’m a BNN viewer and I watch a slick, smart sounding wealth manager, I go to their website and read a lot about their strategy, their customer first focus, and the rest of the sales pitch.   Many times they offer a free portfolio review for qualified investors (i.e. we won’t look at you unless you have a certain amount of money to make it worth our while).
What I rarely see is any evidence of performance results.  Or perhaps some limited results are posted, but I can bet you they will only show the results that make the manager look good or they compare their results to something weird like inflation.

The problem with wealth managers is the same as it is with mutual funds:  high fees and the unfortunate fact that very few people can beat the collective brainpower of the market over the long term.   There is no free lunch in investing.

The best thing you can do for yourself is invest in low cost index funds and stay away from the temptation of BNN.

WHY BNN DOESN’T HAVE MUTUAL FUND MANAGERS AS GUESTS

WHY BNN DOESN’T HAVE MUTUAL FUND MANAGERS AS GUESTS


Can you guess why?  I’ll give you a hint.  Horrible performance that is easy for viewers to find out about.  Mutual funds must post their performance and there are several places investors can visit to find out exactly how they are doing.  My favourites are morningstar.ca and globefund.com.

Do a quick search next time you hear about some hot mutual fund and you have a roughly 75% chance to find out that the fund you were interested in performs worse than the index it tracks over the long term.

If BNN allows these fund managers on TV, viewers will eventually realize these suits on TV are not worth watching; then we can say bye bye to BNN, even with all the pretty young woman reporters (not a coincidence).

So how does BNN get around this problem?   Choose guests who don’t run mutual funds but rather are wealth or portfolio managers.

Wealth managers don’t run conventional mutual funds and therefore do not have to publicly disclose their performance like mutual funds.  In theory, wealth managers can create individual portfolios to match the goals and risk tolerance of each of their customers.  I guess that’s how they get around the reporting requirement we see with mutual funds.

So if I’m a BNN viewer and I watch a slick, smart sounding wealth manager, I go to their website and read a lot about their strategy, their customer first focus, and the rest of the sales pitch.   Many times they offer a free portfolio review for qualified investors (i.e. we won’t look at you unless you have a certain amount of money to make it worth our while).
What I rarely see is any evidence of performance results.  Or perhaps some limited results are posted, but I can bet you they will only show the results that make the manager look good or they compare their results to something weird like inflation.

The problem with wealth managers is the same as it is with mutual funds:  high fees and the unfortunate fact that very few people can beat the collective brainpower of the market over the long term.   There is no free lunch in investing.

The best thing you can do for yourself is invest in low cost index funds and stay away from the temptation of BNN.

A 25% CHANCE OF SUCCESS

A 25% CHANCE OF SUCCESS

From The Economist Magazine, February 13, 2015
BETTING on red gives the punter an 18-in-37 chance (in Europe) or 18-in-38 chance (in America) of success in roulette. Parcel out your money carefully and you might have a diverting 20 minutes or so until it’s all gone, with a few wins along the way. If the odds were just one-in-four, then the whole game would be much more discouraging.

But those have been the chances, over the last 20 years, of largecap US mutual funds beating the market. It has happened in just five calendar years. In one sense, this is hardly surprising; professional fund managers own the bulk of stocks, so the average fund manager performance should match the index. But the index doesn’t have costs and the fund managers do. Those costs doom the fund managers to underperform. One does not have to believe in the efficient market hypothesis to understand this outcome.

But to the exent that any market is efficient, largecap US stocks is the one; dozens of analysts cover every stock and their business models are well known and understood. The chance that any investor has a unique insight into a particular company is very small.

Here are the figures from Morningstar for each of the last 20 years.

Year           % of outperforming funds    ave fund return    S&P return

1995                                 11.2                                  31.4                   37.6

1996                                 21.4                                  19.5                   23.0

1997                                 9.8                                   26.1                   33.4

1998                                24.3                                  20.5                   28.9

1999                                43.7                                  22.1                   21.0

2000                               63.6                                  -3.6                    -9.1

2001                                42.6                                 -13.8                  -11.9

2002                               39.8                                 -23.3                  -22.1

2003                               38.2                                  28.0                   28.7

2004                              43.0                                  10.2                    10.9

2005                               58.6                                   6.2                     4.9

2006                               32.8                                  12.5                    15.8

2007                                55.0                                   7.5                     5.5

2008                                37.4                                  -38.6                -37.0

2009                               59.4                                  30.0                   26.5

2010                                37.8                                  14.4                   15.1

2011                                 18.7                                  -1.6                     2.1

2012                                36.8                                  14.9                   16.0

2013                                51.8                                  32.6                   32.4

2014                                 13.4                                  10.3                   13.7

Note that 2014 was actually the third worst year in terms of the proportion of funds that managed to outperform; fewer than one-in-seven managers did so. On average, active funds underperformed by around 1.6 percentage points a year, a big handicap for clients. There was one year, 1999, when most funds underperformed but the average return was slightly higher than the market. Still, the average return only beat the market 6 times out of 20. (To be fair, if one takes the average of each of the 20 years, active funds have outperformed 37% of the time. But that’s still very low.)

To those who would say that passive funds are also doomed to underperform the market after costs, that is true, but their costs are a lot lower. A shrewd gambler would consider them a much better bet.

Of course, many people will ignore this advice. They see an index fund as a boring commodity product; they want the best in class, a manager that can outperform. And no active manager will admit that he (or she) is likely to underperform. But it is remarkable how few will put their money where their mouth is.

http://www.economist.com/blogs/buttonwood/2015/02/mutual-fund-investing

A 25% CHANCE OF SUCCESS

A 25% CHANCE OF SUCCESS

From The Economist Magazine, February 13, 2015
BETTING on red gives the punter an 18-in-37 chance (in Europe) or 18-in-38 chance (in America) of success in roulette. Parcel out your money carefully and you might have a diverting 20 minutes or so until it’s all gone, with a few wins along the way. If the odds were just one-in-four, then the whole game would be much more discouraging.

But those have been the chances, over the last 20 years, of largecap US mutual funds beating the market. It has happened in just five calendar years. In one sense, this is hardly surprising; professional fund managers own the bulk of stocks, so the average fund manager performance should match the index. But the index doesn’t have costs and the fund managers do. Those costs doom the fund managers to underperform. One does not have to believe in the efficient market hypothesis to understand this outcome.

But to the exent that any market is efficient, largecap US stocks is the one; dozens of analysts cover every stock and their business models are well known and understood. The chance that any investor has a unique insight into a particular company is very small.

Here are the figures from Morningstar for each of the last 20 years.

Year           % of outperforming funds    ave fund return    S&P return

1995                                 11.2                                  31.4                   37.6

1996                                 21.4                                  19.5                   23.0

1997                                 9.8                                   26.1                   33.4

1998                                24.3                                  20.5                   28.9

1999                                43.7                                  22.1                   21.0

2000                               63.6                                  -3.6                    -9.1

2001                                42.6                                 -13.8                  -11.9

2002                               39.8                                 -23.3                  -22.1

2003                               38.2                                  28.0                   28.7

2004                              43.0                                  10.2                    10.9

2005                               58.6                                   6.2                     4.9

2006                               32.8                                  12.5                    15.8

2007                                55.0                                   7.5                     5.5

2008                                37.4                                  -38.6                -37.0

2009                               59.4                                  30.0                   26.5

2010                                37.8                                  14.4                   15.1

2011                                 18.7                                  -1.6                     2.1

2012                                36.8                                  14.9                   16.0

2013                                51.8                                  32.6                   32.4

2014                                 13.4                                  10.3                   13.7

Note that 2014 was actually the third worst year in terms of the proportion of funds that managed to outperform; fewer than one-in-seven managers did so. On average, active funds underperformed by around 1.6 percentage points a year, a big handicap for clients. There was one year, 1999, when most funds underperformed but the average return was slightly higher than the market. Still, the average return only beat the market 6 times out of 20. (To be fair, if one takes the average of each of the 20 years, active funds have outperformed 37% of the time. But that’s still very low.)

To those who would say that passive funds are also doomed to underperform the market after costs, that is true, but their costs are a lot lower. A shrewd gambler would consider them a much better bet.

Of course, many people will ignore this advice. They see an index fund as a boring commodity product; they want the best in class, a manager that can outperform. And no active manager will admit that he (or she) is likely to underperform. But it is remarkable how few will put their money where their mouth is.

http://www.economist.com/blogs/buttonwood/2015/02/mutual-fund-investing

TO SIMPLIFY AND FILTER

TO SIMPLIFY AND FILTER

To simplify and filter; that is the reason I started this blog. The amount of information on investing for retirement is overwhelming, contradictory, and self serving. Some people may argue that my strategy is too simple, but what’s the alternative? Seek out the advice of a financial advisor who, in the worst case scenario, gets paid by putting your money in high fee mutual funds?

And even if your advisor doesn’t make money this way but instead charges you an annual percentage, is it really necessary to pay someone any amount of money for something that you could easily do yourself? I’m not taking about renovating a bathroom here.

Being a successful saver is not about hitting home runs, it’s about not making mistakes. So save 6-10% of your income, depending on your chicken index (the more of a chicken you are, the higher your percentage), invest it in 3 Vanguard index funds and forget about it.

A couple of times a year, transfer money from your savings account to your discount brokerage account, put in a buy order to buy 1,2 or 3 of the funds depending on whether you need to rebalance to keep the 33%,33%,34% ratio and be done with it. It’s that simple.

These simple steps will put you miles ahead of most Canadians who either don’t save or are afraid to do it themselves.

Worse yet, there are Canadians who can’t help themselves and try to become superstar traders. I’ve met some of these folks over the years. What strikes me most about these guys (and yes, they’ve always been men) is that they truly cannot or will not answer one simple question I pose to them.

The question is: How do you know if you’d be better or worse off if you just bought simple index funds instead of doing all your trading? Put another way: How does your performance as a trader compare to a buy and hold index investor? They just don’t know!

Just once I’d like to hear some trader tell me they’ve created a spreadsheet that shows 2 options.
Option 1: starting money and calculate money made (or lost) from trading
Option 2: same starting money but calculate gain or loss if invested in index funds instead.

And then compare the performance of the 2 options. If they can honestly say they are better off investing using Option 1, over a long period of time (not just a lucky 6 months), then good for them. Unfortunately, I have’t met an amateur who has taken the time to compare.

If you absolutely must buy individual stocks, either go for strong dividend payers, or buy shares in companies with a pro who has a very long and strong history of excellent capital allocation. Companies like Warren Buffett’s Berkshire Hathaway, Prem Watsa’s Fairfax Financial or Gerry Schwartz’s Onex Corporation.

TO SIMPLIFY AND FILTER

TO SIMPLIFY AND FILTER



To simplify and filter; that is the reason I started this blog. The amount of information on investing for retirement is overwhelming, contradictory, and self serving. Some people may argue that my strategy is too simple, but what’s the alternative? Seek out the advice of a financial advisor who, in the worst case scenario, gets paid by putting your money in high fee mutual funds?

And even if your advisor doesn’t make money this way but instead charges you an annual percentage, is it really necessary to pay someone any amount of money for something that you could easily do yourself? I’m not taking about renovating a bathroom here.

Being a successful saver is not about hitting home runs, it’s about not making mistakes. So save 6-10% of your income, depending on your chicken index (the more of a chicken you are, the higher your percentage), invest it in 3 Vanguard index funds and forget about it.

A couple of times a year, transfer money from your savings account to your discount brokerage account, put in a buy order to buy 1,2 or 3 of the funds depending on whether you need to rebalance to keep the 33%,33%,34% ratio and be done with it. It’s that simple.

These simple steps will put you miles ahead of most Canadians who either don’t save or are afraid to do it themselves.

Worse yet, there are Canadians who can’t help themselves and try to become superstar traders. I’ve met some of these folks over the years. What strikes me most about these guys (and yes, they’ve always been men) is that they truly cannot or will not answer one simple question I pose to them.

The question is: How do you know if you’d be better or worse off if you just bought simple index funds instead of doing all your trading? Put another way: How does your performance as a trader compare to a buy and hold index investor? They just don’t know!

Just once I’d like to hear some trader tell me they’ve created a spreadsheet that shows 2 options.
Option 1: starting money and calculate money made (or lost) from trading
Option 2: same starting money but calculate gain or loss if invested in index funds instead.

And then compare the performance of the 2 options. If they can honestly say they are better off investing using Option 1, over a long period of time (not just a lucky 6 months), then good for them. Unfortunately, I have’t met an amateur who has taken the time to compare.

If you absolutely must buy individual stocks, either go for strong dividend payers, or buy shares in companies with a pro who has a very long and strong history of excellent capital allocation. Companies like Warren Buffett’s Berkshire Hathaway, Prem Watsa’s Fairfax Financial or Gerry Schwartz’s Onex Corporation.