Canadian Financial DIY

Parallels between Love and Investment

noreply@blogger.com (CanadianInvestor) — Sat, 07 Nov 2009 18:36:00 +0000

Renaissance man Ben Stein ruminates about the similarities between a successful approach to love and to investing in the delightful Lessons in Love, by Way of Economics on the NY Times website.

One thing he forgot to mention is that being good at one does not automatically make you successful at the other!

Time for Portfolio Vaccine against Swine Flu?

noreply@blogger.com (CanadianInvestor) — Tue, 03 Nov 2009 12:14:00 +0000

Last year it was the banks the precipitated a market crash. This year will it be swine flu?

All of a sudden, swine flu is in the economic news. Today, GlobeInvestor's H1N1 sick days could hamper Canada's fragile recovery notes the potential for swine flu to make the economy sick. At the same time, CBC's headline article A perennial bull turns negative about the pessimistic outlook of market commentator Josef Schacter includes swine flu as a negative point in his outlook.

Perhaps my view is coloured by what I learned during the brief stint I spent in a former job helping to plan for a flu pandemic, but I am a bit worried too for a couple of reasons. First, there is the reality of a pandemic. By definition a pandemic directly makes sick an awful lot of people, up to a third of the population during the peak of an outbreak. Whether its kids or adults falling sick, a lot of people may take time off work to minister help. Whack! Take that, economy and stock market.

As bad as the real effect is, the panic effect could be worse. If stories of food and fuel shortages start appearing in the press, who knows what panicked people might do. Whack again, economy and stock market.

The key to avoiding all this is control of the outbreak. Thankfully, there is a vaccine, whose effectiveness is unknown but it could still work well if enough people are vaccinated according to Swine Flu Vaccine Predictions from the UK National Health Service. Enough people is a huge number - "... only 70% of the population would need to have the vaccine to reduce the impact of the virus to that of a relatively mild seasonal flu epidemic". 70% means about 0.7 x 33 million = 23 million people in Canada need to be vaccinated but the total so far is only 1 million according to the Montreal Gazette. The reference to striking increases in flu activity is alarming. Official statistics on actual infection rates are hard to get. The national Public Health Agency seems to publish only the number of deaths, which thankfully is low, but that doesn't help too much since the main impact of low-mortality rate swine flu is sickness not death. We are left with Google's Flu Trend indicator, which it claims tracks actual cases quite accurately. Below is a screenshot of today November 3, 2009.

Yikes!, an almost vertical upward trend, except for Quebec, which is different as ever and totally blank for some unexplained reason. I've been watching it for the last month as the country turned bright red, not an indicator that the Liberals have finally won an election, but the sign that things have gone as bad as the scale goes.

For an investor, what happens in the USA matters greatly and the Google trend there is pretty high too. The World Health Organisation provides weekly updates on its H1N1 portal for all parts of the world and swine flu seems to be advancing everywhere to differing levels of intensity though the data's usefulness is suspect since many countries have stopped reporting individual cases. The Pan American Health Organisation publishes a very cool inter-active, but useless (due to stale data), map of swine flu.

A portfolio equivalent of vaccine in this case is to use put options on market ETFs such as XIU in Canada and VTI in the USA to shield against a market downturn. That protection can be secured by buying a 90 day put. A flu pandemic might last a few months, it doesn't last forever and since the death rate is low (barring an unpredictable mutation that changes it) for this swine flu, the bad effects also won't last forever either. Is it still worth buying put options?

Given the relatively high likelihood of a temporary flu-induced market sneeze, it is very tempting to play the speculator and really go "whole-swine" into puts. On the other hand, since I expect to be invested in the market for many years hence, the dip will not harm me in the long term.

What to do, what to do ... just accept the discomfort since the chances are low for a fatal infection to my portfolio, or try to make some money predicting the short-term future.

Contracts For Difference for Canadian Retail Investors: Beware!

noreply@blogger.com (CanadianInvestor) — Thu, 29 Oct 2009 12:02:00 +0000

Last Sunday, GlobeInvestor posted the news that henceforth Canadian retail investors in Ontario and Quebec would be allowed to open accounts to trade in Contracts For Difference (CFDs). As Wikipedia describes, CFDs have long existed in the UK, Australia and elsewhere but not in the USA.

In a CFD, the investor bets against a market making broker, in Canada's case CMC Markets, either that a stock or other security will go up, by going long, or that it will go down, by going short (see CMC's examples for how it works). The amount the stock moves away from the price at the time of taking the position/contract to the sale is the difference and that determines the investor's loss or profit. The key unique characteristic of CFDs is the huge amount of leverage they entail, which creates an enormous bang for your investment buck - good or bad. CFDs are essentially a way to get rich or go broke at warp speed. Due to the magnification effect of leveraging, unlike regular stock purchases, you can lose far more than your initial investment.

Since CFDs do not have an expiry date, unlike options which do expire, it might be thought that a retail investor with a long term perspective might for example, simply buy the TSX index long and hold on till the market eventually rises, making sure to keep plenty of cash around to meet the almost inevitable calls for extra cash to maintain margin requirements. However, there's a catch - long positions are subject to a daily interest charge as long as they are open. It is as if one has borrowed the whole amount (see section 2.1 of CMC's rates and fees). The interest rate on the notionally borrowed money is currently low - about 2.8% annualized by my calculation (just a bit less than discount broker BMOIL's 3.5% interest rate on margin debt and a bit more than the TSX 60's current dividend yield of 2.7% ... raising the question, unanswered on CMC's website, whether the Canadian version of CFDs pays out the dividend to the long investor as is the case for CFDs in the UK for instance) - but it still lowers returns and creates a disincentive to anything but short-term speculative day trading with CFDs.

The supposed hedging value of CFDs is minimal. If one takes an offsetting short CFD to balance against a long stock position one already holds, then one simply freezes the total value (excepting the inevitable costs) of the two holdings since a rise or fall in the CFD simply mirrors in the opposite direction the stock holding's movement. Most people think of hedging as downside protection, not both downside and upside. An investor is better off with a straight put option or a stop loss order.

About the only party sure to benefit from CFDs is the market maker CMC Markets, from collecting the bid-ask spread on buys and sells, the interest on open positions, trading commissions and other charges. It is ironic that CMC's website links to this Financial Post story which says that the founder and CEO of CMC Peter Cruddas is London's richest man (interesting isn't it that he is at the top of the Times 2009 online richest list just ahead of a some online gambling site owners). That's where you money will go folks unless you are one of the lucky few who play and win the CFD lottery.

TFSA Account Adoption Creeping Steadily Up

noreply@blogger.com (CanadianInvestor) — Tue, 27 Oct 2009 17:04:00 +0000

RBC has just released a survey that shows the number of Canadians opening TFSA accounts is climbing steadily and is now at a quarter of eligible (18+) Canadians. Back in April Jonathan Chevreau had reported in his Wealthy Boomer blog that 20% had opened accounts to that point. The good news is that most people - over 70% - are mostly aware of the TFSA. Hopefully, the slow to act will soon join the list ... hint to some members of my family!

It was a wonderful coincidence that the January 1st start-up date more or less marked the bottom of the equity slump so those who were quick to jump in have seen a very healthy return so far - my initial $5000 evenly split between XIU and XMD has risen 33% or so since my account opened in February, a great tax-free return.

Maybe more Canadians should be a little more adventurous than the cash savings and the GICs that dominate TFSA account holdings according to RBC. Interest rates are so low that there isn't much point to tax-free savings if there isn't any income generated. RBC's headline to its press release - Why aren't Canadians taking advantage of tax free savings accounts? - is true in more ways than one.

Friday Fun: How Much do Pro Golfers Make?

noreply@blogger.com (CanadianInvestor) — Fri, 23 Oct 2009 10:10:00 +0000

Ever notice how the sports reporting on the winners of golf tournaments says little or nothing about how much money pro golfers make? In these hard economic times it isn't wise to rub it in how much these guys and gals make.

Canadian Business / MoneySense in Golf Earnings 2009 has dug up the data and done a bit of calculation to make us envious. Isn't it a hoot to know that Tiger earned $4191 for each stroke he played?!! It really puts in perspective the three hacks it took me to get out of a sand trap in a recent round. I calculate my $$$ per round not in revenue but in cost - green fee and lost balls.

Worse, as much as these guys make on the course, it is the off-course endorsements and related business (like course design) that their competitive success makes possible which really brings in the dough. It is astounding that Woods in his career could make $1 billion from golfing.

Government Ban on RRSP - TFSA Swaps Revisited: One Red Herring and the Real Problem

noreply@blogger.com (CanadianInvestor) — Thu, 22 Oct 2009 07:22:00 +0000

Sometimes I'm a bit thick and it takes a while for the real reality to distinguish itself from the illusory reality.

The Illusory Reality: Yesterday I noted the scenario mentioned by two other bloggers - see here and here - for supposedly moving funds tax-free from an RRSP to a TFSA. The illusion is that the investor moved funds but what has actually happened is that the investor made a profit on an investment in the TFSA account and made a loss in the RRSP account. To see this, it is only necessary to remember that the exact equivalent result could be achieved by simply buying and selling on the market instead of doing a swap. In fact, a swap is just that - instead of the investor buying or selling on the open market, his accounts buy and sell to each other.

Another tack is to think of it in the investor's shoes - after the stock price rises in the TFSA, you are $XXX better off in total wealth. Would you really want the stock to decline after your RRSP buys it so that the TFSA can buy it back? After the round trip of swaps and the stock decline, the investor has less money in total than after the TFSA made a profit. The TFSA is the same but the RRSP is worse off. In any case, there is no guarantee that the stock will happily fluctuate up and down within the range needed to come out ahead on a net basis. That's why day trading is a highly risky proposition.

This non-problem is a manifestation of the sunk cost fallacy. At each step of the process, the investor is faced with a clean slate and a new decision about how to invest. The past, however recent, is irrelevant. I certainly hope the Department of Finance policy is not meant to stop this kind of investor operation because the government would then be taxing the profits of normal risky stock purchases and sales.

The Real Reality: The real problem is revealed in the discussion on the Financial Webring TFSA thread. It is the fact that the tax rules allow an investor to choose which price within a security's trading range on the day of the swap to have applied to calculate the value of the swap. The difference between the high and low price is what generates the tax-naughty riskless profit for the investor who has eliminated the market risk through judicious use of options. A more volatile stock, or a volatile day to perform the swap, is better because it produces a higher high-low spread and that increases the risk-free profit. Options also use less capital than straight stock, which boosts the returns.

That being the case, the Government would seem to be engaging in throwing out the swap "baby" with the dirty hi-lo price "bathwater". Instead of banning swaps (which doesn't make sense anyway since direct stock trades can effect the same outcome) or changing the rule that any price during the trading day when the swap takes place may be used to value the transfer amount, either declare that two-way swaps of the same security will automatically be valued at the same price within the same day, or perhaps within 30 days in a manner akin to the superficial loss rule. There's even a catchy name to give it - the superficial swap rule.

TFSA Ban on Asset Swaps with RRSPs

noreply@blogger.com (CanadianInvestor) — Wed, 21 Oct 2009 08:01:00 +0000

Updated later in the day - see red text.
The proposed new rules to eliminate potential abuses of TFSA accounts announced the other day by Finance Minister Flaherty includes one strange rule (see the Department of Finance's Backgrounder section on Asset Transfer Transactions) that bans swaps between TFSAs and registered accounts like RRSPs, LIRAs, RRIFs.

I must admit I was puzzled since I had not previously seen anyone proposing a way to avoid taxes by doing a swap.

There seem to be several explanations of what the rule prevents:

A visit to the Financial Webring where all the usual suspects gather and gleefully point out such tax "work-arounds" uncovered in a TFSA thread a post by Marty123 on Oct.20th detailing a highly sophisticated strategy using massive over-contributions and options.
Blogger Michael James on Money's post TFSA Abuse shows another scheme that seems to fit the bill.
The Canadian Tax Resource blog gives a similar example to Michael's.

Perhaps it is the space limitations of traditional media but the clear online examples put to shame the ambiguous description in the Globe and Mail article on the subject.

My direct question to the Department of Finance for an example has yet to be answered (stay tuned for what they eventually tell me). Here is what they said: "The idea would appear to be that overall, advantage is rarely gained but the scheme is such that a large number of small swaps, particularly involving volatile stock, could enable capital gain to exceed tax liability, using financial software and hedging strategies."

In this first year of the TFSA when the contribution limit is only $5k, it is likely Michael's strategy would hardly be worth it considering each swap is charged a fee by the broker ($45 flat fee per security swapped at my discount broker) and it would eat up much of the tax savings. However, down the road when accumulated TFSA room gathers bulk, the benefit becomes more attractive.

Yet to be confirmed also is the import of the tax penalty. The Department of Finance phrase is: "TFSA amounts reasonably attributable to asset transfer transactions will be taxable at 100%." I would think that what it means is that you would be taxed on whatever "excess" you had managed to transfer - the $1000 in Michael's example - at your normal marginal tax rate i.e. just as if you had withdrawn the $1000 directly from the RRSP, and not at a 100% tax rate, which would amount to confiscation by the government of the excess shifted, an action that even for the government is a tad harsh. " Update: I was wrong, ouch! quote from an official spokesman of the Department of Finance - "No it’s not the marginal rate, it’s a levy of the full amount of the *gains*. It won't matter much anyways since the brokers will all block any sort of swaps with TFSAs and registered accounts.

I wonder if the government will now ban swaps between locked-in registered accounts and non-locked-in registered accounts since the same technique Michael describes could be used to move value and unlock locked retirement money.

Book Review: The Secret Language of Money by David Krueger with John David Mann

noreply@blogger.com (CanadianInvestor) — Mon, 19 Oct 2009 13:44:00 +0000

I like this book. Reading it made me reflect, it explained puzzling human behaviour about money and investing with a neat combination of physical and psychological science and good stories, it gave me practical, implementable advice to, as its subtitle says, "make smarter financial decisions and live a richer life".

The book provides a welcome new approach to improving our own investing and financial success. Unlike the general run of investing books written by economists, mathematicians, engineers, author Krueger formerly practised as a psychiatrist and is now an executive coach. Instead of the facile and useless "just say no" kind of thought that seems to follow from the huge catalogues of irrational investor behaviour (e.g. see Behavioural Finance), Krueger offers ingenious solutions to defeating to defeating our own bad tendencies. One I laughed at is his suggestion to counter impulse spending on a credit card by freezing it a block of ice.

Money is such an essential part of our lives (quoted in the book is the statement of Albert Camus: "It is a kind of spiritual snobbery that makes people think they can be happy without money.") that even one practical thought that a reader actually does something about will make its price more than worth it. And the book does cover a lot: basic attitudes, emotions about money and its alignment with life values and goals, aka our money story, debt, reckless spending, scams, bubbles. Find out why everyone, no matter what their income, thinks that about twice their current income is what it would take to make them happy (oops, caught me too!) and then what to do to make the numbers match up better so you can stop having money be a source of anxiety and become merely the means to an end that it should be.

Quotes:

re out of control spenders: "The spender's true goal, whether it is affection, intimacy, prestige, esteem, comfort, or connection, is something that money cannot buy."
"A balanced healthy approach to spending means using your money in those ways that best serve your values and your goals in life."
"Cons work because they tell us what we want to hear."
"... the graying of America has created a bull market on fraud" because the part of the brain that is most useful to detect the irrationality of scams, the pre-frontal cortex, tends to wane with advancing age
"Success has less to do with skills and intelligence than with a mindset." ... phew!, I was worried there! I'm not making fun of this statement. The story on page 55, which I presume is true, about the two anthropologists who have totally different outcomes in an experiment because of a difference in mindset struck me as powerful illustration of what I have observed so often - people who succeed but should not have based on "rational" factors and others who fail when by all rights they should have succeeded.
"Focus your energy on where you are headed rather than where you've been."
"Why do we keep walking the same path over and over, as if "trying harder" will make the critical difference - when we know very well where it is almost to lead?"

My main quibble is that some of the suggested cures to investing-related mistakes seem weak, too general or not very relevant.

Maybe another edition in future will beef up that part but in the meantime this is an excellent book in my opinion. 4.5 out of 5 stars.

Thanks to McGraw-Hill for providing me with a free copy to review. Check the book's own website to get a flavour of the book with some substantial content.

Other bloggers have reviewed this book too: Thicken My Wallet, Michael James on Money here and here and Million Dollar Journey

Canada's Place in World University Rankings

noreply@blogger.com (CanadianInvestor) — Fri, 09 Oct 2009 10:11:00 +0000

How do Canada's universities rate when compared with the best in the world. Pretty darn good, I'd have to conclude after looking through the just-published latest Times Higher Education - QS World University Rankings 2009. The ranking are based primarily on ratings of 9300 academics around the world, along with, in order of declining importance, research productivity, student-faculty ratios, employer reviews and proportions of international faculty and students.

Canada took 11 of the top 200 spots, better than many other countries with much larger populations, like Germany with only 10, France with 4
Canada had 12 in the top 200 last year - apparently Asian universities are moving into the top rankings displacing mainly US universities (and what longer term effects will the recession aftermath do to further erode that result?) - competition is hotting up and Canada has no cause for complacency as all but McGill and U of T moved lower in the rankings. See also the 2008 vs 2009 table
the USA (54 of the top 200) and the UK (29) dominate the world higher education business, with all of the top ten between them and 18 of the top 20
in terms of "punching above its weight" in terms of population, Canada is 3rd in the world, at a ratio of about 0.33 (11 universities for a population of 33.8 million) behind the leader UK (ratio 0.47) and Australia (ratio 0.41); the USA is way behind at a measely ratio of 0.18; if one subdivides the UK as Scots are fond of doing(!), wee Scotland with only five million people has the highest ratio of all with 4 universities in the list - ratio = 0.8! ... too bad it doesn't have a very good football team, so everyone could be happy...
McGill is the best university in Canada and number 18 in the world, followed by:

U of Toronto (29th),
UBC (40th),
U of Alberta (59th),
U of Montréal (107th),
U of Waterloo (113th),
Queen's (118th),
McMaster (143rd)
Calgary (149th)
Western (151st)
Simon Fraser (196th)

These Times-QS rankings correspond fairly well with those of Maclean's magazine, which also put McGill on top amongst the medical/doctoral schools, though Queen's is second there and Dalhousie, Saskatchewan and Ottawa rate ahead of Western.

Thoughts for the Active Management Mutual Fund Industry

noreply@blogger.com (CanadianInvestor) — Thu, 08 Oct 2009 12:35:00 +0000

Ottawa Business Journal wrote about the new Investment Partners Fund which has a completely different fee structure from the usual 2% or so annual MER charged by the average Canadian equity mutual fund. The fund managers will only charge a fee if returns exceed 5% in a year. If the fund loses money or makes weak returns, no fee! Over 5% return, they will charge 0.25% for every 1% (or part) return. If the fund was to get a 9% return, which would be quite an achievement, that would be a 1% fee for the year, pretty darn reasonable.

Only thing the article doesn't mention is whether the fund may or will use leveraging (borrow extra money) to try juicing returns, which of course the managers have extra incentive to do. I'd certainly want to see a restriction on borrowing in the fund policy. Otherwise the risk of loss goes way up. Make it a pure stock picking challenge.

Unfortunately the fund is only open to accredited investors, i.e. rich people or professional investors.

But it does offer an idea to our over-charging fund industry.

Financial Times Video Interview Series on Future of Investing

noreply@blogger.com (CanadianInvestor) — Thu, 08 Oct 2009 08:10:00 +0000

In this October 2nd video interview in the Financial Times, the CEO of BlackRock (world's largest investment managers) Larry Fink says that investing opportunities in the next 5 to 7 years will be more attractive outside the USA. He sees on-going high unemployment, government budgets and slow economic growth constraining investment success.

Another of the FT series on the future of investing interviews Henry Kaufman, described as an elder statesman of Wall Street. He talks about the sources of the credit crunch crisis. It is evident that the causes are still there - huge financial concentration means institutions that are too big to fail, which they know of course, allowing them to take inordinate risks in pursuit of profit, which they have done and will do again, since the appetite for reform is now fading as markets and economies begin to recover. Meanwhile, a big cause of the original crisis - cheap money aka interest rates at zero - is still there. All of which means another crisis is down the road, But what happens if governments are still labouring under the large debts they assumed in bailing out the last crisis?

A priceless moment in this interview occurs when the interviewer asks Kaufman, who has just said he thinks institutions should be allowed to fail as a means of keeping them from taking too many risks, whether he thinks it was correct that Lehman was allowed to fail. Kaufman happens to have been on the Board of Lehman at the time. Delight as we might at Kaufman being hoisted on his own petard, we might ask where was the line between having to make less than ideal decisions while firmly holding one's nose and self-serving favoritism.

Yet another interview with Daniel Putnam of Grail Partners predicts that retail investors will see more and more complicated products, like mixes of active and passive, guaranteed and not guaranteed, personally tailored for each person. Bye, bye mutual funds, hello structured products. I see a great danger that individual investors won't be able to understand them and the providers will take the opportunity to build in very handsome profit margins. Will regulators step up to ensure that investors receive enough understandable information to make intelligent decisions about whether he/she is being offered a fair deal?

There are also interviews with Benoit Mandelbrot of (now growing in fame) Mis-behaving Markets doing an "I told you so" and a series of principal players in the Lehman Brothers collapse doing "it wasnae my fault" for the first year anniversary of the incident that confirmed that some financial institutions really are too big to fail.

Scam and Investor Fraud Alert Sources

noreply@blogger.com (CanadianInvestor) — Wed, 07 Oct 2009 10:19:00 +0000

DIY investors have to be on their toes against scams and frauds, perhaps even more than ordinary advisor-guided investors (though some might want to debate that point). Here are few online sources I've found to help check out current known illegal schemes.

Ontario Securities Commission Investor Warning List
Alberta Securities Commission Investor Watch page
Canadian Securities Administrators Disciplined Persons search tool and Cease Trade Orders database covering all provinces
BC Securities Commission's InvestRight website has a heading Scams in the News on the home page, an Investment Caution List and an Alerts and Watches
PhoneBusters (sponsored by the RCMP, the Ontario Provincial Police and the Canadian government Competition Bureau) posts more of the "breaking news" type warnings including the dastardly Puppy scam
Quatloos "A public educational website covering a wide variety of financial scams & frauds"; blog and discussion forum includes a lot of US and international content
Fraud.org has North American content

UN Praises Canada

noreply@blogger.com (CanadianInvestor) — Tue, 06 Oct 2009 10:33:00 +0000

The latest UN Human Development Report rates Canada as the 4th best country in the world for its overall success in achieving well-being for its citizens. The UN defines well-being as a combination of three things : "living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and gross enrolment in education) and having a decent standard of living (measured by purchasing power parity, PPP, income)". 4th is the same position as in 2004.

I daresay that since the data was compiled in 2007, Canada will have moved up into 3rd at least since number 3 Iceland's woes in the 2008 crash would have put a big dent in its standard of living.

Note that the USA is 13th and the UK 21st in the ranking. It is nice also to notice that the upward trending lines of the total averages suggest that the world is becoming a better place to live!

The chronically grouchy CBC doesn't even mention Canada's outstanding result, choosing instead to play up the negative with its UN Calls for Better Deal for Migrants. In contrast CTV highlights the UN's praise for Canada's immigration policies.

Surprising Facts about Scams

noreply@blogger.com (CanadianInvestor) — Fri, 02 Oct 2009 21:32:00 +0000

Bet you didn't know this:

"... scam victims often have better than average background knowledge in the area of the scam content."
"... scam victims report that they put more cognitive effort into analysing scam content than non-victims. This contradicts the intuitive suggestion that people fall victim to scams because they invest too little cognitive energy in investigating their content, and thus overlook potential information that might betray the scam"
" ... People who show above average vulnerability to scams do not seem to be in general poor decision-makers, for example they may have successful business or professional careers."
"... some people become 'chronic' or serial scam victims:"
"... victims are often acting against their own better judgement: with some part of their minds they recognise a scam for what it is."
Source: The psychology of scams: Provoking and committing errors of judgement a University of Exeter study sponsored by the UK Office of Fair Trading released in May 2009

If you don't believe the research read the cautionary tale Why we keep falling for scams in the Wall Street Journal, written by Stephen Greenspan a university professor psychologist specialized in (studying about) gullibility. Of all people, he was one of Bernie Madoff's victim investors and uses himself as a case study. His interesting conclusion - spreading assets and savings around is a way to reduce the risk of losing all through unforeseen disasters such as a scam. Works for investments in general too, I'd add.

David Krueger's recent book The Secret Language of Money (which I will soon review) also discusses how scammers ultimately depend on our complicity and emotional responses overwhelming our rational brains. He cites one clever investing scam that I've not seen described before. He calls it the Uncanny Forecaster Scam. To get the trust and confidence of the victim, the scammer posing as a broker calls 100 people and tells half that it will go down and the other half that it will go up. No investment is asked for yet. Then he calls back the half for which the answer was correct and again tells half that group that it or any other stock will go up and the other half that it will go down. Presto! Half will be right again! Then he calls back the targets who are by now impressed with his expert forecasting and suggests they send along $25k or whatever for another suggested investment. Bye bye money.

I like one scam avoidance guideline in the Exeter study: "... if you
think an offer might be a scam, it almost certainly is – your gut instinct is almost invariably right."

One mental antidote to scams might be to adopt what might be called the government bureacracy decision-making rule - avoidance of error at all costs: be so skeptical that nothing is ever approved if there is the slightest chance that it could go wrong.

Book Review: Benjamin Graham on Investing, ed. by Rodney Klein, commentary by David Darst

noreply@blogger.com (CanadianInvestor) — Thu, 01 Oct 2009 09:26:00 +0000

Job ad ... Value Investor: must be highly skilled in dissecting financial statements, especially reading between the lines and uncovering what management may be deliberately or unwittingly concealing; must have great patience and diligence in calculating and estimating data; must be able to separate wheat data from chaff data; must combine internal financial data with external market psychology and national or global economic forces; must have the courage and confidence in one's conclusions to go against the flow of popular and/or professional market opinion or prices; must have the judgement to know when to hold 'em or fold 'em.

Those are some of the thoughts coming to my mind while reading this collection of original writings by the seminal value investor Benjamin Graham. We can see how the master thinks and assembles data into a cohesive analysis. The big question for the individual investor - could I do the same?

Graham speaks for himself in the book through the articles. I wish the editor Klein and commentator Darst had done more to enhance their teaching value by drilling into Graham's analysis, as for example, Jason Zweig does in the Graham classic The Intelligent Investor. For instance, in this day of information overload, it easy to get swamped by irrelevant or misleading details. Could Klein/Darst not have reconstructed the moment in time to say what Graham left aside, or even better to say what he missed? I was asking myself, "so no one is perfect, how good were Graham's analyses in retrospect?" After all, one feature of good investing is to learn from one's mistakes.

Further to that line of thought, I made a small effort to delve into one article, that comparing American Agricultural Chemical (AGR) and Virginia-Carolina Chemical (VC). In the book, Graham says VC is the better buy. Was he right? There's not much to be found through Google for those companies, neither of which exists today (more on that in a minute). From what I did find, Graham was correct, sort of. As of Graham's writing around September 1918, AGR's common share price was $100 and VC's $53. A scant four years later at the end of 1922, their prices were: AGR $32, down 68% and VC $25, down 53%. The Dow Jones Index had moved up from the low 80s to the mid 90s. VC was thus better than AGR in a relative sense but neither was good in an absolute sense. What was Graham's mistake? This, I believe: "... the particular strength of both companies lies in the benefits they will experience from the return of peace. (p.70) ... They have more to hope and less to fear from the future than perhaps any other industry (p.73) ..." In fact, the US suffered a severe postwar recession during 1920 and 1921, not a peace bonus. As fine as was Graham's backward looking analysis, he got the forecasting bit wrong it seems. I did not trace AGR's and VC's history to know whether Graham's conclusion would have made money at any point - that's what Klein and Darst should have done, instead of waxing lyrical about the Aeneid. (It's a bit over the top to say that Graham's writings, well crafted as they are, rank on the same level.)

As for disappearing companies, it is remarkable how few of those mentioned in the book exist today. Capitalism sees companies rise and fall quickly. The mighty of yesterday are gone today. To some degree the foundation of value investing is that the future will be like the past and/or present for a company, e.g. when we buy companies with a record of steady dividend growth, we assume that will continue. For those who don't pretend to know, there's passive index investing.

As a result, this book has no direct investing value relative to today's markets and companies. It is of some pedagogical value for value aficionados, since it is always worthwhile reading the original of any sector's leading mind, like Graham is acknowledged to be.

My rating: 3 out of 5

Watching the UK Get Older - What Effect on Government Finances?

noreply@blogger.com (CanadianInvestor) — Thu, 01 Oct 2009 07:36:00 +0000

Found on the BBC website Maps chart UK's ageing population this brilliant animated map (compare the map to Statistics Canada's yawn-inducing text Population Projections for Canada, Provinces and Territories) that shows the steady ageing process as the years roll on. Starting from 1992 and projected to 2031, the inexorable slow ageing process is visually striking as the map gets more and more of the darker coloured areas indicating the ageing. Whether the measure is median population age or 65 and older, the pattern is the same. Increasing longevity is evident too as the over 85s triple their share of population.

One interesting phenomenon is that there was not much change through the 1990s but suddenly around 2002 the phalanx of those of State Pension Age or older begins to rise from 18.3% of the population to 19.5% by 2010. That's over 730,000 extra people potentially drawing State Pension. It surely doesn't help government finances. Just as a period of negative market returns is a bad time to start drawing on one's retirement portfolio, so it is for a country, except that the UK government has no choice.

McKinsey Says Emerging Equity Markets Will Grow Faster

noreply@blogger.com (CanadianInvestor) — Wed, 30 Sep 2009 08:22:00 +0000

A few weeks ago, I noted research results which concluded that there is no automatic, direct relationship between GDP growth and equity market performance, and I cautioned against jumping too fast into investments in China, India and Russia.

Now along comes global consulting firm McKinsey & Company with its annual Global Capital Markets review (summary here with link to full report, which is free upon registration) with the view that Emerging country Equity Markets will grow considerably faster than major developed markets like the USA, the UK, Eurozone and Japan (Canada is too insignificant to merit much of McKinsey's ink). Notable quote: "... asset classes in mature markets are likely to grow more slowly, more in line with GDP, while government debt will rise sharply. An increasing share of global asset growth will occur in emerging markets, where GDP is rising faster and all asset classes have abundant room to expand." Equity is one of the asset classes they discuss.

McKinsey cites several reasons for thinking that equity in emerging markets will do better:

high savings rates in those countries mean a lot of money is available to invest and equity is better placed than debt to be the investment vehicle
these countries have great needs for infrastructure construction
financial markets in emerging countries are still quite small compared to GDP and thus have much room for growth
many state-owned enterprises have yet to be privatized

Along with the big constraint of the government and private debt burden in developed economies, McKinsey see higher inflation as a risk. They see little hope of big gains in equities: "These projections give little support to the hope that corporate earnings and valuations will rise again to significantly and sustainably higher levels in mature markets ."

It seems that McKinsey may not be alone in coming to such conclusions. The rebound in Emerging Markets has been much stronger since January 1st, as the iShares' Emerging Markets Index Fund (EEM) has outstripped such developed market ETF indexers such as SPY (S&P500), VGK (Europe) and XIC (Canada) in the Google Finance chart below.

Admittedly, Emerging Markets did fall off much more drastically during the crisis last fall but they have still outdone the developed ETFs from just before the worst moments of the crash, between August 1st last year and today, as this second Google chart shows.

Reasearch Results on Whether Financial Advisors Help or Hinder

noreply@blogger.com (CanadianInvestor) — Thu, 24 Sep 2009 07:21:00 +0000

Sadly, the answer is that financial advisors hinder according to Do financial advisors improve portfolio performance?, a just-released study of German investors at Vox by university professors Andreas Hackethal, Michalis Haliassos and Tullio Jappelli. The reason is the old bugaboo - costs and fees.

Advisors add value but ... "Even if advisors add value to the account, they collect more in fees and commissions than they contribute." Apparently the authors found that richer, older people tend to use advisors more which accounts for a preliminary gross conclusion that "Investors who delegate portfolio management to a financial advisor achieve on average greater returns, lower risk, lower probabilities of losses and of substantial losses, and greater diversification through investments in mutual funds." They note that the financial industry would love to grab that statement for publicity. However, the net truth is completely opposite: "Once we control for different characteristics of investors using financial advisors, we discover that advisors actually tend to lower returns, raise portfolio risk, increase the probabilities of losses, and increase trading frequency and portfolio turnover relative to what account owners of given characteristics tend to achieve on their own."

Of course, that does not mean that all advisors are bad for your financial health. It does mean choosing carefully, however.

So, DIY investors, take heart. Follow sound investing practices and you too will succeed.

Bad Stuff: Harmonized Sales Tax and Sprott Clampdown on Questrade Trailer Fee Rebates

noreply@blogger.com (CanadianInvestor) — Wed, 23 Sep 2009 15:36:00 +0000

There has been a nose-to-nose yelling match going on between the mutual fund industry and the Ontario government about the extra costs that will result from the Harmonized Sales Tax. But that's not all the HST will affect.

Financial author of No Hype–The Straight Goods on Investing Your Money and speaker Gail Bebee sent along a good commentary, excerpted below, about several other consequences that will hurt individual investors. Grrr!

"There are many investing-related services that are currently subject to the Goods and Services Tax (GST), but not provincial sales tax (PST). These services will probably be subject to the HST, a combined PST/GST tax that effectively increases their cost by 7% in BC and 8% in Ontario. Here is a partial list of services that will likely be impacted:

1. RRSP, RESP or RRIF administration

2. Setting up and holding your mortgage in your self-directed RRSP

3. Transferring securities to another institution

4. Mutual fund and portfolio management

5. Financial, tax and estate planning

6. Changing the beneficiary in an RRSP, RESP or RRIF

7. Searching records and providing copies of account statements.

Concludes Bebee, “Investors should lobby their investment dealers for price reductions to compensate for the pending HST increase. Businesses can afford to drop prices because the new tax regime will significantly reduce business costs.”

For more information or to arrange an interview, please contact:

Gail Bebee

Canada’s Independent Voice on Personal Finance

Tel: 416-733-0221 gbebee@gailbebee.com"

***********************************************
Another frustrating development comes from Sprott Mutual Funds for clients of Questrade. Questrade PR person Lynn Suderman sent along the following blurb with which I can only concur. (Note, I do have an account with Questrade but don't own any Sprott funds)

"As you may recall, Questrade launched a Mutual Fund Maximizer service (with trailer fee rebates) in January. As of yesterday, September 16^th, Sprott Asset Management decided to block the purchase of any Sprott fund by Questrade clients and will no longer be paying the trailer fee rebate. Why? We’re not entirely sure – their reasons are vague. No other mutual fund company is blocking sales of funds or trailer fee rebates.

Attached is a bit of background on the issue. Questrade will be pursuing all available avenues to reinstate Sprott funds and Sprott trailer rebates to our clients. In the meanwhile, I thought you may be interested in this turn of events. Note that Jonathan Chevreau wrote about it in his blog today:

http://network.nationalpost.com/np/blogs/wealthyboomer/archive/2009/09/17/sprott-blocks-trailer-fee-rebates-to-questrade-clients.aspx

I’m hoping to encourage people to lodge complaints with Sprott, the Competition Bureau, OSC, etc – see if we can get this overturned!

This is part of the email sent to our clients who own Sprott:

If you would like to show your support for Questrade and our trailer fee rebate program, we invite you to contact Sprott and the regulatory bodies that oversee our industry. Their contact information is below. Please remember to copy (cc) your letter and emails to marketing@questrade.com.

Sprott

invest@sprott.com

http://www.sprott.com

Toll Free:

1.888.362.7172

The Competition Bureau of Canada:

To fill out a complaint: http://competitionbureau.gc.ca/eic/site/cb-bc.nsf/frm-eng/PJSH-6X9KQY

http://www.competitionbureau.gc.ca

Toll free:

1.800.348.5358

The Ontario Securities Commission

inquiries@osc.gov.on.ca.

To fill out a complaint: https://www.osc.gov.on.ca/Contact/ct_cat-form.jsp

Toll free:

1.877.785.1555

Book Review: Conserving Client Portfolios During Retirement by William P. Bengen

noreply@blogger.com (CanadianInvestor) — Tue, 22 Sep 2009 08:18:00 +0000

Big bucks but big bang. Conserving Client Portfolios During Retirement costs $65 USD but does it ever deliver value. Both the content and the presentation are superb. Bengen applies his experience as a financial planner working with real individual people to thoroughly cover the many aspects of making investment money last through retirement. He does the work of an author brilliantly, which is to be clear about assumptions and methods, state caveats and limitations but then to digest and distill the data. The result is a compact 165 page small format large print volume with dozens of tables and graphs. Those illustrations are the condensation of what he says believably are thousands of hours of calculation work. The prosaic title (the chapter headings are the same) characterizes the writing style - plain and direct but crystal clear. There is nothing fancy about the book - no jokes or coy titles, no famous quotations, no hot tips or investor alerts, no sidebars or key points summaries. You could say that it is all steak and no sizzle, except that the content itself sizzles.

The Content: Bengen's book is about the narrow but critical topic of how to get the most withdrawal cash out of an investment portfolio without exhausting it prematurely. His fundamental assumption is that the past is the best guide for the future. Using US index data for stock, bond and Treasury bills from the Ibbotson yearbook from 1926 onwards, he systematically tests how well all sorts of portfolios and strategies would have fared. The key metric is what he calls SAFEMAX - the maximum annual withdrawal as a percentage of the portfolio at start of retirement that would have ensured portfolio survival no matter what year retirement started.

The Bengen Variations (somewhat akin to Bach's Goldberg variations): these are all the conceivable options taken in turn to see what effect each has on the base case withdrawal rate of 4.15% (yup, he states two decimal points - is it obvious he started his career as an engineer?)

asset allocation - varying proportions of asset classes - large company stocks, small company stocks (can boost SAFEMAX up to 4.55%, a 0.4% gain), intermediate term US government bonds, long term government bonds (don't help at all) and US Treasury bills (can substitute for the intermediate bonds)
time horizon - in five year increments from 10 years to 50 years (a forever portfolio can sustain 4%)
reduction in safety (frequency that portfolio would not have survived and shortest longevity) from higher withdrawal rates up to 8.75%, where he cuts off around a portfolio has only a 50-50 chance of surviving the target duration
alternative withdrawal strategies - 1) withdrawing more during early active retirement years instead of a constant inflation-adjusted amount throughout (not very attractive as the later year penalty is too great); 2) fixed percentage of the portfolio every year (looks unattractive due to large variations in withdrawals); 3) floor and ceiling withdrawal amounts to take less during bad years and more during good times (looks pretty good)
active investing out-performance and under-performance by + or - 2% per year (really gives pause to think whether any but the passive index approach is worth pursuing)
how much to lower withdrawals in order to leave a legacy
value of reducing equity allocation during retirement (not worth it)
making adjustments to withdrawal rate during retirement (it's essential to monitor and adjust if things get too bad and it's possible to boost the safe rate as you get older and life expectancy declines) but ...
bear markets "... the intervention of a major bear market does not have to undermine a client's previous plans for withdrawals during retirement, assuming he initially planned to withdraw at SAFEMAX."
taxation of the account - using accounts whose effective tax rate was zero (the base case, like a RRIF), 20%, 35% and 45%; the tax Engen computes would be coming from inside the account, taken out of the portfolio before withdrawal
historical fall in dividend yields from rates above 5% up to the 1950s to about 2% in recent times (don't worry, makes no difference)
withdrawing once a year or every quarter
retiring date and withdrawal start at beginning of year or at beginning of various quarters - " ... a difference of only one quarter in the date of retirement can have a major effect on the longevity of a portfolio"
rebalancing frequency from every three months to almost 12 years (about every four years seems best)
whether or not to shift asset allocation (e.g. more fixed income) in anticipation of upcoming retirement (read it and find out!)

The final chapter sets out three case study scenarios based on Bengen's experience dealing with his clients, showing the actual application of the principles. Due to quite different life goals, like travel, donations, inheritances, the recommended initial withdrawal rates vary considerably from and seem to be appreciably higher from the base case 4.15%. Yet Bengen obviously thinks these would work ok since he insists on the importance of leaving a substantial margin of safety in choosing how much to withdraw. There is one improvement to this chapter I'd like to see: instead of calculating a future model portfolio value using average past returns for every year, Bengen should show what happens in the worst case scenarios of past markets. People who see a projected portfolio that continues to rise in real terms with steady 8.3% in returns every year might scale back their initial withdrawal rate considerably if they see that a severe bear market combined with high inflation, such as happened in the 1970s, could bring them close to portfolio exhaustion.

Another caveat is that actual investment returns modeled on indices such as the Ibbotson data used in this book, cannot and will not be achievable. Bengen does not name any mutual funds of ETFs an investor could actually buy. Though the costs of running the mutual funds and ETFs will theoretically lower their returns by that amount and cause them to systematically under-perform the index, it seems that some funds like the Vanguard Small Cap ETF actually outperform the index (see Seeking Alpha's Indexing: Mutual Funds vs. ETFs and Beating The Benchmark). So it's hard to say absolutely that using index returns is an error.

Many mutual funds, especially those in Canada with outlandishly high fees, are wont to seriously and continuously under-perform. Bengen's chapter 7 on chronic under-performance from active management gives us a way to estimate the penalty - e.g. a 60% equity portfolio with a 30-year horizon would have to reduce the withdrawal rate by 0.3% to compensate for a 1% decrease in average stock returns.

A Canadian investor trying to emulate the same investment approach with the TSX index and Canadian bonds might not be able to achieve exactly the same returns. We could not thus expect to set a sustainable withdrawal rate quite as high as Bengen describes for US investors since Canada's real returns on equities and bonds have been slightly less than the USA's over the period 1900 to 2008 per the Credit Suisse Global Investment Returns Yearbook 2009 by Elroy Dimson, Paul Marsh and Mike Staunton.

Another limitation, which he admits freely in the book, is that other asset classes now available were excluded from the analysis due to lack of long term historical data. He does say that he believes those additional types of assets probably would benefit retirees' portfolios but they are not modeled.

A final caveat is that the scenarios assume that other sources of income, notably annuities, are taken as a given, but in fact, a key choice for a retiree is how much of a retirement account to annuitize, as Moshe Milevsky points out in his recent book Are You a Stock or a Bond? A portfolio does not stand alone as a source of returns, inflation protection or reduction of income variability.

The book is addressed to financial advisors but every individual intending to manage their own investments in retirement will benefit enormously from buying it.

My rating (à la Bengen): 4.83 basic plus 0.17 boost for the many blog post ideas it gave me = 5.00 out of five stars

Postscript: Bengen is a fee-only advisor. When I sent him an enquiry form on his website to ask about some aspects of the book, within an hour he sent an email saying I should phone, which I did and lo and behold, he was there and took my call. If he does that for a lowly blogger I bet his clients are happy, not to mention well-served by the application of the knowledge in this book.

The Perfect Investment Storm for Retirees

noreply@blogger.com (CanadianInvestor) — Mon, 21 Sep 2009 14:36:00 +0000

Ever wonder what was the worst possible time to retire? Most people might guess that it was around the time of the Great Depression of the 1930s. That's wrong. The generation of retirees hit hardest since the 1920s was that starting retirement in the mid to late 1960s, just before the perfect storm of the 1970s, which combined a severe bear market in 1973-74 with a period of high inflation. The double whammy of lower equity values along with higher withdrawals to maintain a lifestyle would have depleted a 60% equity 40% bond portfolio about 5 years faster than the worst possible quarter to start retirement during the late 1920s. It wasn't just one or two quarters of retirees that suffered, it was a whole generation of those retiring from about 1962 to 1972. I came across this surprising fact in William Bengen's book Conserving Client Portfolios During Retirement (see figure 5A on page 58). Jim Otar's new book Unveiling the Retirement Myth available at his Retirement Optimizer website shows the same result (page 115 of the green online version, in the chapter on inflation).

It's a reminder to retirees to be concerned about inflation. The last dozen years or so, inflation has been very stable and low - around 2% per year. But will that continue? Certainly it is a central objective of governments but will they be successful in containing inflation if government deficits and borrowing grow out of control?

Some ETFs Don't Track Their Index Too Well

noreply@blogger.com (CanadianInvestor) — Sat, 19 Sep 2009 07:53:00 +0000

Investors like me who merely seek to replicate the returns of a broad index and not to time markets but merely passively track the index often use ETFs to do so. It's probably no surprise that ETFs vary considerably in how well they do the job of tracking the target index. The measure of the deviation from the index is tracking error.

Forbes' ETFs Behaving Badly article and accompanying 20 Best and 20 Worst slide shows describes results of a survey of 505 US-traded ETFs done by Morgan Stanley for 2008. In many of the worst cases the tracking error is several percentage points. The best have really tiny tracking errors.

Many of the worst trackers turned out to have out-performed or done better than the index in 2008. The article explains how some of those came about which gives me the sense that it's likely to keep happening. It's perhaps a nice accident that some results were better than the index in 2008 but in future years an uncontrolled or uncontrollable tracking error could well mean serious under-performance. Just give me the index please!

Most of both the best and worst lists are quite specialized ETFs. It's reassuring to see that among the best are Vanguard's Total US bond market ETF (BND) and iShares US TIPS Inflation-Indexed Bond Fund (TIP). A surprise is that some of the worst are several Vanguard offerings like their Energy Fund (VDE) and a Telecomms Fund (VOX) and an ETF heavyweight, iShares MSCI Emerging Markets Fund (EEM). There are also several bad country trackers, notably iShares' ETFs for Mexico (EWW) and Austria (EWO) and the SPDR S&P China fund (GXC).

The Benefits and Imperfections of Asset Class Investing

noreply@blogger.com (CanadianInvestor) — Wed, 16 Sep 2009 10:42:00 +0000

What's Wrong with Judging Investment Performance with an Index
One of my pet peeves is articles about investment performance based on the price variation of indexes such as the TSX, the Dow or the S&P 500. Unfortunately they do not reflect real world individual investor experience. Though it is possible to buy ETFs or mutual funds whose objective is to track an index, such things as trading costs / commissions, tracking error, bid-ask spreads and distributions can cause actual results to vary from the index.

Another thing I find annoying is that people often limit themselves to indexes for only two asset classes - stocks and bonds. We've all seen the classic 40% bonds, 60% stocks. There are a lot more asset classes out there with which to diversify, like real estate (REITs), real return bonds, foreign developed or emerging market equities (which introduce the issue of currency hedging), small and value cap tilts, commodities. Current theory says we should take advantage to maximize diversification and the ETFs are there to allow the average investor to do that, so why not model it?

Another issue of note is whether and when to rebalance a portfolio. Would a policy of reviewing the portfolio every December, and rebalancing if too much out of sync with target allocations, have done better than simply buying and holding?

Finally, the recent (on-going?) financial crisis and market crash provides a real high stress period in which to see how various realistic portfolios fared.

Assumptions: So, I've done some calculations in as realistic a way as possible. I started with $100,000 in May 2007 before the troubles really began and took it to the close last Friday, September 11, 2009. The portfolio is split 70% equity, 30% fixed income, with finer sub-divisions of both for the 4- and 16-asset portfolios. I used passive index ETFs available on US exchanges and the TSX.

The USD-CAD exchange rate I've used is based on the mid-market closing rate, which I've adjusted for the initial purchases by adding 1% to approximate the foreign exchange fee embedded in Canadian broker rates. At the Dec.17, 2008 rebalancing date, I have not adjusted for FX since almost all of the FX fee could be avoided by doing wash trades offered by most brokers and/or keeping the USD distributions in a USD account when received, as all brokers allow for non-registered accounts and some do for registered accounts. Also I have not deducted any US withholding tax from the US ETF distributions, which is ok for ETFs held in registered accounts but not in a TFSA or a non-reg account. So that assumption might slightly overstate returns depending on the account in which a portfolio is held.

As to rebalancing, I modeled none in Decmeber 2007 because the ETFs had not strayed far from their May target percentage allocations. Ths cash distributions were merely accumulated in the account. I ignored interest on the cash since it would have been too little to matter. ... all this stuff about my assumptions shows why so many people don't like taking the trouble to do realistic calculations - it's painstaking!

Results:

big surprise, the simplest portfolio, consisting of only the iShares S&P/TSX 60 Index (XIU) and the iShares ScotiaCapital DEX Bond Index (XBB) fared best in every way!! It dropped the least to the review point of Dec.17, 2008 and has recovered almost fully (less than 1% below) to the starting value. That's why I've named it the "KISS Me Quick" portfolio - It has treated you well - who doesn't like a kiss!? It's KISS = Keep It Simple Stupid and it sure is quick to implement.
big surprise again, the more diversified the portfolio, the worse the results! Huh, I though diversification was supposed to help, but whether or not the strategy was buy-and-hold or rebalancing, the fancy 16 asset portfolio did worst: it dropped the most and has receovered the least. That's why it's called the "Diversification Guru" - we all know what gurus are really worth.
wow, rebalancing really worked well. In the short time since last December, all three rebalanced portfolios have outdone the buy-and-hold approach by anywhere from 7% to 9%.
no surprise, diversification by holding fixed income is a lot better than just equities; if only XIU had been in the portfolio, there would have been a 31% drop in value, even including distributions. That's much worse than the 22% fall of even the worst portfolio, the 16-asset version. And XIU as of Sept.11th was still 14% below its initial value of May, 2007. The strong recovery of XIU has not made up the ground lost up to December. The reason is that no rebalancing occurred, as it could not with a single asset.

Why More Diversification Didn't Work

real estate and foreign markets - some of the extra asset classes fell harder than Canada's; the UK's banks made up a bigger chunk of the FTSE index and they had just as much trouble as US banks
currency shifts - up to last December, the CAD's big drop relative to USD as the flight to safety occurred cushioned some of the blow of drastically falling stock markets but since then the strength of CAD (check all the blue appreciation of the last 3 months at RatesFX) has limited the upside.

Further Thoughts:

the future may not be like the past - this time and in this relatively short period, it was bonds, particularly government bonds, that provided the critical diversification benefit. Safety of principal was the issue. That may not be the case if inflation for instance, is the next big threat. In an uncertain world, different assets for different threats is still my best guess at what will allow me to survive if not thrive quite as much as the strategy which has worked best in retrospect.

UK Immigration Rules Ruin People's Lives in Order to "Protect" Them

noreply@blogger.com (CanadianInvestor) — Mon, 14 Sep 2009 18:26:00 +0000

Through a sad and bizarrely crazy new set of immigration rules, the WWB (World Wide Bureaucracy) has struck again in the UK as a happily and voluntarily married young Canadian-Welsh couple will be obliged to live apart for a couple of years due to regulations supposedly designed to protect young British women of Pakistani or Bangladeshi origin from being forced into marriage. The woman involved is not British (she's Canadian), she has no Pakistani, Bangladeshi or any remotely Asian roots by all appearances ... I know, I know, I'm revealing my deep prejudice by coming to that conclusion by looking at her name (Wallis), her white face, her red hair ... and both she and her husband vehemently deny any coercion to get married.

She's not especially young either, being 19 years old, and sounding rather mature in the BBC news interview found in the above link. It's interesting that UK law permits 16 and 17 year olds to get married with their parents' permission. Above that age, Brit teens can marry if they like. By the logic of the regulations which deny marriage visas to foreigners under 21, the implication is that pure Brit teens are superior to non-Brits.

This case leads one to wonder if the new regulations were cast in such an un-necessarily broad ill-fitting manner to adhere to political correctness and avoid singling out a particular country or ethnic group. The "for the greater good some have to suffer" explanation put forth by the Home Office is laughable. Since all of the cases cited in the What is a forced marriage? booklet of the Forced Marriage Unit website involved teens travelling to another country, maybe the government should simply have banned all foreign travel by British citizens under 21?

As a Canadian who, though considerably older than this couple, came to the UK through marriage to a British citizen and experienced frustrations dealing with the Home Office in getting the necessary visas, I have a great deal of sympathy for Adam and Rochelle. I really hope their problem gets sorted, though the bureaucratic stonewalling and circling of wagons to back up the idiotic Home Office regulations is all too evident in the BBC account.

Annuity Payouts Improving but All Over the Map

noreply@blogger.com (CanadianInvestor) — Tue, 08 Sep 2009 15:27:00 +0000

Annuity rates move more or less in tandem with interest rates - as interest rates fall, so do annuity payouts. Not long ago, the IFID centre posted a time series going back to 2000 showing sample annuity payouts and implied longevity yield, described as a measure of an annuity's return. It's a handy and welcome way to judge the trend and whether things are getting more advantageous for a retiree to turn a lump sum into an annuity. The recent trend seems to be upwards towards higher payouts e.g. a 65 year old male could get about $680 monthly income at the end of June (it's the latest data apparently) per $100,000 initial premium versus $650 or so last September. The highest it has been was about $740 in 2000-2001 so there is some way to go before rates get really attractive.

It is also worth noting that it is essential to shop around. Cannex has one freebie table of current annuity rates offered by the various providers showing payouts for a single life male with a 10-year guaranteed payout. There is a wide range - a 65 year old can get as little as $594 monthly from Standard Life to as much as $667 from Canada Life or Great_West Life, a 12% difference.