Pharmadaddy

Family dinner

noreply@blogger.com (Pharmadaddy) — Tue, 07 Feb 2012 05:38:00 +0000

Growing up, I was blessed enough to live in a house where family dinner was not just a weekly occurrence. It happened every single night. With rare exceptions, we were all at the table each night, eating home cooked meals. It was not long after my departure from this idyllic setting that I discovered this is a rare thing these days. It is so rare, in fact, that public health agencies and addictions services authorities now actively promote the importance of regularly sitting down for family supper.

The beauty family dinner repeatedly emphasized for me when I watch what must be one of the best TV dramas in years, Blue Bloods, every Friday night. You see, besides the complex crime dramas that unfold and the rich characters on display, the true beauty of Blue Bloods is in its unforgiving depiction of traditional family values, most notably expressed in its repeated display of the Reagan family dinner.

Now, I like to think of myself as a fairly progressive guy. I took my wife's name when we got married for crying out loud. But I also understand that there are some traditions that should be continued because of their overall benefit not only to society as a whole, but to individuals within society, and one such tradition is family dinners.

The benefit is not just perceived. Research demonstrates the positive impact of regularly eating together as a family, like here and here. It is obvious why this would be so. But the beauty of the Reagan family dinner on Blue Bloods, and in my humble opinion, the recipe for perfect family dinners, is its insistence on consistency of attendance, thoughtful thankfulness prior to dining, preparation of home cooked whole foods, and most importantly, lively discussion.

This weeks episode outlined some of the rules of the Reagan family dinner table.

1. Nothing is secret. All topics are fair game.

2. Everyone's opinion counts.

3. You can't be criticized for expressing your thoughts, only debated.

This is what dinner should be among families, particularly those with a significant population of mature individuals. Of course my family dinner involves the kids telling me about their day, Ivy being silly by spitting out applesauce, and us trying to keep them entertained long enough to stay at the table for a full meal.

But I dream of a day when I can have my children over to my house every Sunday with their children. Where we'll all do our part to prepare the meal and all give thanks for what we receive. Where we'll all be fearless about expressing our opinions, even on controversial, emotional subjects and in the face of seemingly irreconcilable differences. A day of consistency and security in an otherwise fast-paced, unpredictable life where all the worries of the week gone past fade and the challenges of the week ahead become irrelevant. Because all that matters in life is before us in that short, sweet gathering of those we love known as the family dinner.

Questions to Expose a Bad Advisor

noreply@blogger.com (Pharmadaddy) — Thu, 02 Feb 2012 06:04:00 +0000

What does one do if they really want their investment portfolio to do well but they really don't care for all the numbers and complexities of investing? Well, for one, if you can't take a bit of time to educate yourself on one of the most important financial decisions in your life, than I have no sympathy for you if your retirement goals come crashing spectacularly down when 60 rolls around. And if you think just having your bank advisor take care of everything will solve your problems, think again. If you are wise enough to have a professional fee-only advisor managing your investments, than you can probably rest easy. But for the rest of you, buyer beware if you are not educated.

The beauty is, very little education is necessary to give you the tools you need to ask smart questions. And smart questions often lead to dumb answers. And dumb answers lead to fired advisors which leads to better served investors. Read on to find some excellent places to start and then to read a great list of simple questions you can make your advisor sweat with.

First read this post on the 7 Most Common Investor Mistakes. It is great. Educate yourself further by reading books like The Wealthy Barber and Millionaire Teacher. They're accessible and fun. If you want just as excellent information but maybe in a less jovial presentation check out some stuff by David Trahair and The Little Book of Common Sense Investing. And if you want to completely immerse yourself, try a subscription to Money Sense. One issue will give you more financial knowledge than you've possessed in your entire life.

And start questioning your advisor. Ask him things like "Well, if you were so confident of these funds last year, why are you moving me this year? I trust your decisions and I would rather we stick with your first instinct." Make them develop an asset allocation that fits your needs and ensure they review your current portfolio status at least once a year to see if it aligns with your planned asset allocation. If you have more than 5 funds in your portfolio, start to ask some serious questions. If your advisor is contacting you more than once a year to change your fund purchase allocations, get a new advisor. They are churning your portfolio to get rich on commissions and aren't worth your time. It's not illegal but it sure as hell should be.

Some other questions to ask your advisor.

1. What is my internal rate of return over the last 1 year, 3 years, 5 years, since inception?

Any advisor worth their salt should be able to give you this information. If they hesitate, fire them. If they don't know what you are talking about, fire them and then tell all your friends to avoid them like the plague. In fact, post that on their door.

2. What is the aggregate MER of my mutual fund portfolio? Anything over 2% is seriously questionable and you best be seeing some absolutely mind blowing answers to the following questions to justify that charge.

3. Am I in any load funds?

Answer should be No. If even one answer is Yes, get out. You will likely be locked into those funds for 7 years without taking a penalty on sale of the units, but get rid of this advisor immediately. There is absolutely no justification for selling load funds.

4. Am I in any funds-of-funds? If the answer is yes, seriously reconsider this individual or institution. If they answer No to the following question, proceed cautiously but they can live another day. And that question is "Are the MERs of the underlying funds charged to the unitholders of the overlying fund?" If the answer is YES, get the sam hell out of there. You are getting charged TWICE.

5. How long have my funds been around? I once had an advisor try to sell me a fund showing me a performance chart from 2008. It looked like roses. Of course it did. The fund was born when the market was at its lowest point in decades. Everything has looked like roses with 2008 as a starting point. You should ideally be invested in funds that have 10 years of performance data. Leave plugging millions of dollars into shiny new funds to the other suckers out there. You are not one of them anymore.

6. How have my funds performed compared to their benchmark? If the benchmark is some really complicated name, be skeptical. If it is a big benchmark like the S&P 500, MSCI EAFE, TSX 60 or TSX Composite, then great. If they are underperforming their benchmark by anymore than 1%, they cannot possibly be justifying the expenses they are charging you. If they can't provide that info, that is terrible. Because you can get it for free at Globefund.com by comparing your funds performance to the index and comparing it to any index. So check it anyways for your interest. And then fire them. Conversely, you could check the numbers based on your last statement and then come in with a barrage of really tough questions about your fund performance. Ooh, that would make them sweat!

7. How could you assist me in constructing a portfolio of low-cost index funds or broad market ETFs? If they start going on about the pitfalls of index funds and ETFs and how they won't do it because it will hurt your investment outlook, get out now. If they are honest with you and say they recognize the strengths of those approaches but their company requires they sell their mutual funds in order for the "free" advice they provide you, then go ahead. Again, the key here is consistency. If you like and trust this person and they have you in a simple mix of broad based equity and fixed income funds and they don't stray from that approach, then you could do worse than to just stick with them.

As always, if they looked totally stunned, confused, blank, or otherwise threatened or frightened by your question, you should seriously consider leaving them. And I'm not joking. And I cannot emphasize enough that if you have an advisor selling you load funds, you need a new advisor.

In the end, if you feel too overwhelmed by the whole process but are very seriously concerned about the performance of your portfolio and you reaching your retirement goals, consider professional advice from a second party. Companies like Weigh House Investor Services offer services like PortfolioCheck where they look over your existing portfolio and give objective advice....well, basically on how bad it looks. They charge for the service of course, but if you are interested in leaving your existing advisor, they will also help point you in the direction of an investment manager they trust that will serve your needs better. Again, you will pay a bit out of pocket up front, but your long term returns will be substantially higher and compounded over your working life will mean a substantial increase in the size of your retirement fund. As a last resort of course you could e-mail MoneySense magazine and come grovelling on your knees requesting a Financial Makeover. You'll get all these experts pouring over your portfolio for free!

Please feel free to contact me with any questions. I am not a certified expert but I can often point you in the right direction.

The Devastation Wrought by Performance Chasing

noreply@blogger.com (Pharmadaddy) — Thu, 02 Feb 2012 05:13:00 +0000

As promised, I give you my third post on why using bank advisors, or really any commission-based or products-based advisor, is a bad idea for your retirement plans. The first was based on the historically higher expenses charged by this group of advisors. The second idea was what I've seen many people do which is hold all their money until February when they scramble to max out their RRSPs. Of course, my hypothesis that this would harm their long term returns was not upheld by the data, as I posted. But it is still a risky situation to put yourself in, if for no other reason than you may never get around to it and then you are leaving money uninvested that could be compounding its growth. This never was a great argument against advisors anyways since it is often the fault of the investor, not the advisor. Advisors would likely be just as happy to have those regular funds come in so they can collect regular trailer fees.

The common advisor practice of encouraging performance chasing is, however, the fault of the advisor and it most certainly is detrimental to the retirement goals set by the investor.

Performance chasing, in its most common form, goes like this. When you go for your yearly review with your advisor, he goes over a variety of funds that have done great over the past year and convinces you that, because they are on such a hot streak, you should move your money into them. This is often done with no regard to the stated goals of your portfolio or your desired asset allocation, which is incredibly reckless in itself because asset allocation alone accounts for 75-80% of portfolio returns.

Now, I was going to research the effects of this but turns out I already did. Here. On this very blog. Hmm. Go figure. In that post I studied the impact of switching all your investments to the top performing mutual funds reported in MoneySense magazine each year versus just keeping your money in a balanced portfolio of index funds and rebalancing yearly. The per year difference worked out to roughly 1%. What is the impact of a 1% performance difference over a 30-40 year investment horizon? Well, I'll take my own example. We put roughly $10 000 per year away for retirement. The difference in 1% performance would work out to about $250000. That's a lot of dough that I lost by chasing hot performers versus just buying and holding and sticking to my asset allocation.

But don't take my word for it. Here is some excellent data from various resources to prove my point.

S&P study: source here

-Over a five year study period, only 1.12% of funds maintained a top-quartile ranking by the end of the study period. Given the MASSIVE universe of funds you have to choose from, guessing which 1 of those funds will remain in the top quartile is a losing game.

Report by Jason Zweig here:

-over a 24 year period, the typical mutual fund underperformed the broad stock market by 0.55%

-but the average INVESTOR underperformed by 0.7%

-this spread is the COST of investors moving their money around too often by chasing performance

-perfect example provided in the article:

-Fund A earned 20.7% in 1996, but their average investor LOST 35%

-Fund B earned 26.9% but the average investor LOST 20%

-THAT IS THE COST OF CHASING PERFORMANCE

Another great report here:

-only 16% of top 5 five funds make it to next years list

-top five funds average 15% LOWER returns the next year

-top five funds BARELY beat the market the next year (0.3%)

-21% of ALL TOP FIVE FUNDS CEASED TO EXIST IN 10 YEARS TIME

-average equity investor earned a measly 2.6% in the same time period that the S&P 500 gained 12.2% and inflation was 3.1%

So what is one to do instead of chasing performance? It's simple. Asset allocation and disciplined rebalancing.

First, you choose an asset allocation that suits your needs. For most this can be as simple as the stock to fixed income ratio. Many suggest that the portion of your portfolio in bonds/fixed income investments should roughly equal your age. I choose to change mine only every 5 years. So when I turn 30 in March I will realign my allocation from my current 25% bonds:75% stocks to 30% bonds:70% stocks. This ensures that as I draw closer to retirement, when I can ill afford significant volatility in my portfolio, less of it will be exposed to stocks, which are inherently more volatile.

The specific breakdown of your asset allocation is a matter for discussion, but can be as simple as 25% bonds, 25% Canadian stocks, 25% US stocks, and 25% international stocks. It's that simple. With that asset allocation, all you need is four index funds, and you are gold. Even the most widely diversified passive portfolio I've seen has only 10 funds in it and that is for very sophisticated investors. Most retail investors can do just fine with 4, even 3 funds and get very broad market diversification that will suit their needs.

Now that you've settled on an asset allocation, you setup pre-approved withdrawals from your bank into those funds EVERY month based on those percentages. Then, every year, if any of your funds is really out of whack on its percentage, you REBALANCE.

So, in my portfolio, I have 37.5% in CDN equity, 25% bonds, 25% international, and 12.5% US. At the end of a year, if any one of those composes 5% more or less than I set it to at the beginning of the year, I rebalance. The beauty of this is that it forces you to sell overpriced funds and purchase underpriced ones, a recipe for success. Look at it this way. If I've been putting exactly 37.5% of my funds each month into my Canadian equity fund but it is suddenly taking up 44% of the worth of my portfolio, the only explanation is a significant rise in the value of that fund. Or if the US fund is down to 8%, it means that US fund has totally tanked. So I sell the gains in my Canadian fund and buy more of the US fund, because the former is bound to come crashing down and the latter is bound to come racing back up. I just locked in my wins and bought some funds on sale. Plus, there was NO EMOTION involved. Just the numbers.

Is there any evidence that rebalancing based on asset allocation actually trumps performance chasing? You bet there is. In this study, the various portfolios that were rebalanced ALL trumped the performance chasing portfolio, until you got into portfolios with very low stock allocations, which only makes sense. The "average" portfolio construction many would use outperformed the performance chaser by 2%. I read a lot of other academic literature that showed similar results.

Now, what do you do if you are in the unenviable position of having a bank advisor for your main source of investment decisions and retirement planning? First of all, get out. But I recognize that some may not be able to do that. So, if you can't get away from your bank advisor or you don't want to, despite what you've read here, at least know thine enemy.

In the next post, I will give you questions to ask your advisor that are sure ways to find out if they are working for you or for themselves.

The Day Pharmadaddy Ate Crow

noreply@blogger.com (Pharmadaddy) — Tue, 31 Jan 2012 05:26:00 +0000

So I planned on posting a triumphant article about the benefits of dollar-cost averaging versus leaving your RRSP contribution to the last minute. I was going to show the devastating impact of holding onto your money and dumping it in your portfolio on February 28 versus divvying it up over 12 months in smaller amounts. Now, there is no denying that the monthly contribution is better from a psychological perspective in that it is less painful to dole out $1000 a month to your investment portfolio than it is to hand over $12 000 in one sitting. But after doing some research, my preconception has been smashed. I ran two portfolios through Globeinvestor Gold, one purchasing $12 000 in investments on February 28, one purchasing $1000 per month for the same amount of time. The test ran from 2002-present. The damn portfolios ended up almost identical. And then I came across all the academic economics research that debunks the whole theory of the financial benefit of dollar-cost averaging. Sure, in some cases, if you invested lump sums each year right before a massive market crash, DCA will look a heck of a lot better. But on the whole, DCA and lump-sum investing seem to work out quite equal. Damn. I shall eat crow and admit that my hypothesis was wrong. In theory, DCA should win. If you were investing in fixed-interest investments, that would be true. If you held onto your money, you'd be missing out on twelve months of growth. But in the case of a diversified portfolio exposed to volatile stock markets, you could just as likely be missing out on twelve months of tanking markets. Guess I should have seen that coming! Oh well, at least I had the good sense to check the facts first! Hopefully my hypothesis about chasing performance will turn out a lot better!

All Those With Bank Advisors: Beware!

noreply@blogger.com (Pharmadaddy) — Mon, 30 Jan 2012 05:26:00 +0000

I am a DYI investor. I've done and continue to do enough reading and have a simple enough financial situation that I feel comfortable with this. This will not always be so and there will be a point at which I will seek out professional help. But the last place I will go is my bank. Going to a bank advisor is one of the worst decisions you can make for your financial health, and over the course of 3 posts, I am going to show you why.

First we will discuss the impact of fees on portfolio performance. The second and third posts will discuss two tactics often employed by bank advisors that not only can I not understand but I believe they could never truly justify: the opportunity costs of lump sum investing and the devastating impact of chasing performance.

When I talk about going to an advisor for myself, I mean individuals who have no vested interest in the PRODUCTS they recommend but instead in the ADVICE they recommend. Bank advisors are handicapped by a limited product portfolio and, as such, you must purchase mutual funds from their bank. In some cases they will broaden the horizon somewhat, but they are still selling you actively managed mutual funds, a sure fire way to fall well short of expected returns (if you need me to explain why, look through some of my past posts or just comment, and I shall oblige with an appropriately indignant rant). Furthermore, most bank advisors have risen up from within the banks lower ranks, taking in-house training courses and learning "on the job". They have no more basic financial education than you or me. Of the 3 advisors I've already encountered in my travels by virtue of necessity in setting up my index investing account through TD, 1 was so delusional about actively managed mutual funds it was clear she was a lost cause, 1 looked at my situation and recommended a cookie-cutter fund-of-funds with an expense ratio of 2.5%, and 1 didn't know what index funds were. And I've heard enough stories from friends and family and in the media to know my experiences were not exceptional.

But if they are so detrimental to financial success, why does everyone use them? Why have the best advisors, that is, fee-only financial planners who don't sell products but advice, not caught on with the general public? One cynical answer would be that the big banks have a huge vested interest in promoting their advisors because that sells their products, which makes them money and brings more assets under their control. All of these are important factors guiding the success of their business, a pursuit that you cannot hold against them. But more pragmatically, fee-only advisors cost money. At least in the traditional I-can-see-the-money-leaving-my-bank-account sort of way.

But what if I were to tell you that bank advisors actually cost you a heck of a lot more than you think?

I'll admit, I've suffered the same pain of loss that comes with thinking about handing over $1500-2000 to a fee-only financial advisor for a comprehensive financial plan. But a simple hypothetical scenario will expose the fallacy of this reasoning.

Let's say I'm 30 and I have already built up a nest egg of roughly $100 000. For reasons beyond my control, I can no longer afford to save anything for retirement. I need this sucker to grow as much as it possibly can. Given my situation, I am holding off on retiring until 65, giving me a 35 year investment window. One hill I will die on is my asset allocation and so I tell my financial advisor I don't care what s/he puts me in, I want it to represent 40% fixed income and 60% equity.

To arrive at the numbers below I used my favorite online tool, Firecalc.com. This tool looks at all the American stock market data from 1871-present. When you enter your retirement time horizon as 35 years, how much you start with, and how much you plan to withdraw each year, it runs those numbers through every 35 year period in that time set. That is a lot of data!

In the first scenario, I walk into a bank. The individual dumps me into some bank-brand mutual funds. Considering an average MER of 1.6% (roughly the average of the big banks, particularly RBC and TD), at age 65 my portfolio would range from $125 757 to $628 782, averaging $287045. (As an aside: If you use other groups like Sunlife Financial or Investors Group, your MERs are likely closer to 2.5% and there are usually nasty load fees. At least the banks usually sell no-load funds.)

In the second scenario, I visit a fee-only advisor. They put me into passive index funds with an average MER of 0.4%. In this case my portfolio would be worth anywhere from $189 881 to $949 404, averaging $433 846.

The average difference is $146 801. What is my point? For one, fees matter. That small difference in management expense fees of 1.2% costs you almost $150 000 over 35 years. For two, bank advisors aren't free. You just paid for their advice with that money. How much could you have spent on a fee-only advisor each year over those 35 years for the same price? $4200. The most expensive I've come across so far is $2500/year and that was for a very comprehensive service.

So, you see, just because you aren't scratching a cheque or pulling money out of your account to pay that bank advisor, doesn't mean his advice is free. It comes at a substantial price. And the above considers that the advice and service they give you over your retirement saving years will produce as good results as that provided by a fee-only advisor. The above projections used the exact same portfolio with the exact same stock market return data. The only difference was the management fee paid on investments. In the next two posts, you will see that there is a pretty good chance that these fees aren't the only money you'll lose before retirement by employing a bank advisor.

Global Inequality

noreply@blogger.com (Pharmadaddy) — Thu, 26 Jan 2012 06:00:00 +0000

I finally got around to reading a book I've had on my list for a LONG time: Stocks for the Long Run by Jeremy Siegel. Considered a seminal work of financial writing ranking up there with The Intelligent Investor by Benjamin Graham, I've always thought it necessary to read it to round out my knowledge base. I'm so glad I did.

Among other things, it will assuage the fears of even the most conservative investor, conclusively showing that a buy-and-hold strategy of investing in a diversified portfolio of stocks and bonds is the best way to amass wealth over long time horizons.

What I found most interesting though was a discussion on the gap that exists in our world between population concentration and wealth allocation. That is, just because a nation has lots of people, doesn't guarantee that it will be wealthy. In fact, quite the opposite appears to be true. In the book, the author publishes three graphs, breaking up various nations and regions in the world. One pie chart shows each nation/region as a percentage of world population, one as each nations' GDP as a percentage of world GDP, and one as each nations' total market capitalization of listed public companies in their national stock exchanges as a percentage of total world market capitalization of public companies.

The graphs show the substantial disparity between wealthy and poor nations, particularly between that vague dividing line of developed and developing nations. But because the data is a bit old, I decided to update it. I accessed World Bank, UN, IMF, and OECD data to compile the most accurate graphs I could on the same basis but for 2010, not 2005 as was done in the book. Considering how much the BRIC countries (Brazil, Russia, India, China) have grown in that time I thought maybe some things have changed. How wrong I was.

The above graph shows various nations/regions in the world, with their corresponding percentages of population, market capitalization of public companies, and GDP. As you will see, some of the least populous nations have the most wealth, the US and Western Europe standing out most starkly. China, with almost 1/5 of the world's population, contains less than 10% of its GDP and equity capital. Africa contains 15% of the world population but only roughly 2.5% of both GDP and equity capital.

Highlighting the discrepancy further, the above graph shows the same data but lumping the nations of the developed world and those of the developing world. You can see from this graph that the developed world contains only 15% of the world population, but contains over 70% of its equity capital and over 60% of its GDP.

Finally, if you normalize each data point by population it gets really interesting. Little Hong Kong actually skews the whole graph. This small, densely populated region of the world contains A TON of the world's equity capital, creating $350 000 of market capitalization for each citizen within its borders. Of course, that makes sense for an island that is essentially one big stock exchange. But you'll see that the developing nations almost drop off the screen and the data are very stark to look at in raw form. The lowest of the developed regions, Singapore and South Korea, sit around $25000 GDP per capita with Eastern Europe, the closest of the developing regions coming in at only $8500.

I'm proud to see my home nation on there punching well above its weight. Canada has the second highest GDP per capita of the listed regions and the highest market capitalization per capita, excluding Hong Kong. (As an aside, if you compare the market capitalization of the Toronto Stock Exchange per capita in the Greater Toronto Area to that of the Hong Kong Stock Exchange per capita in Hong Kong, Toronto wins!)

Of course the causes of the above data are well beyond the scope of this discussion. I just think the data itself is interesting and raises challenging questions. Hope you enjoy it as well.

Investment Manifesto Appendix II: The Index Advantage

noreply@blogger.com (Pharmadaddy) — Wed, 24 Aug 2011 04:52:00 +0000

In researching the plight of Mr. and Mrs. Smith, something kept popping out at me. The financial industry has us all convinced that they can provide value with their services. If we give them our money, they will spin it into gold. That is the whole point of mutual funds and mutual fund managers. They are so utterly intelligent and prescient that they can beat the millions of other individual and institutional investors whose millions of investment decisions made every second of every trading day determine the returns of the market.

That is what we are led to believe. But a unique group of funds put the lie to this whole line of reasoning.

I mentioned before that I chose TD for all my research. It's a company I know well, they have a broad portfolio of mutual funds, and they've been around for awhile so there is plenty of data available. TD, like many other banks and investment firms, offer bundled mutual funds. An example of one of these funds is TD Managed Balanced Growth.

Bank advisers offer these funds to thousands of investors every day across the country. How do I know this? Besides personal experience of course, the evidence. Of the myriad of funds TD sells, the TD Managed Balanced Growth portfolio is eighth in total assets held. Otherwise known as $2.9 billion. And as you'll see below, the other 7 above it are held within many of these packaged funds so their asset ranking really only proves the point further.

These funds are actually funds of funds. By that I mean the overlying fund does not purchase individual companies to match the investment style of the fund. They purchase other FUNDs.
I looked at the four different categories of packaged funds for which TD has 10-year return data. There are four different types of packaged fund with five different investment styles in each.

Types:
Managed: a fund purchasing other funds from within TDs portfolio of funds.
Fundsmart Managed: same as above but purchasing funds within TD and from other companies.
Managed Index: meeting the benchmark objectives of the fund merely by purchasing TD index funds.
Managed Index-e: same as Index but using the e-Series index funds instead of the run-of-the-mill index funds. The only difference is that the e-Series funds are ONLY available online and thus have lower operating costs.

Investment Styles:
Max Equity Growth: 0% fixed income. 100% stocks (35% CDN, 32% US, 35% Intl)
Aggressive Growth: 20:28:25:27 (as above)
Balanced Growth: 40:20:20:20
Income & Moderate Growth: 55:15:15:15
Income: 70:10:10:10

If you believe the financial industry hype and were to rank the returns of these funds since 2003 (the investment horizon of our Mr. & Mrs. Smith) you would rank them in the following order by type, descending by return:
Fundsmart Managed, Managed, Index, Index-e.
Here's why. The Fundsmart Managed are Smart after all. They have access to the whole fund universe, so their genius money managers can use their highly developed skills to find the best funds out there and make scads of cash. The Managed fund managers can pick the best funds, but only within TD. The Index funds, well all they do is follow the whole market. Ha! What kind of loser would hop on board a ship with no captain at the helm? And the e-Series funds? The lowly individual investor can purchase these, on their own, with no help from any professionals and only needing the assistance of branch staff to setup the account, never to interact with them again? Good luck.

Too bad for the fund industry. The ranking, in ALL FIVE investment style classes, is the exact opposite. That is, the one with the most amount of fund industry involvement had the lowest return, and the e-series Index fund had the highest return.

Two other conclusions jump out from this study. The first is found by comparing between investment styles. Within a given fund type, that is Managed or Fundsmart Managed, the return went in lockstep with the percentage of assets allocated to fixed income. This makes sense since the last 8 years have been marked by incredible equity volatility. So as you went from Balanced Growth to Income and Moderate Growth, your return increased because more of your assets were protected in fixed income instruments.

The second conclusion leaps out at you from the page when comparing WITHIN investment styles. Here you compare Managed Income vs Fundsmart Managed Income vs Managed Index Income vs Managed Index Income-e, for one example. As said before, -e wins and the most heavily managed fund loses. What is the relationship here? It turns out that in all 5 investment style groupings, the main contributor to return is EXPENSE, the management expense ratio, or how much it costs to operate the fund. The correlation is -0.86, which is INCREDIBLY STRONG. This means that as the MER goes up, the return on investment goes down.

The fund industry's argument has always been that you pay a higher MER in return for market-beating returns. Obviously not. In every case, the highest ranked fund was the Managed Index e-fund, which had the lowest MER. The inverse can be said for the Fundsmart Managed fund in each group.

But now here's the kicker. In the case of the Managed Index e-funds, all TD is doing is what you can do yourself from home. The fund managers do nothing more than purchase units of the TD e-series index funds at percentages aligned with the asset allocation prescribed by the investment style of the fund. Thus, if your investment style, and that of the fund, is conservative, you might buy 55% in TD Canadian Bond Index-e, and 15% in each of TD US Index-e, TD Canadian Index-e, and TD International Index-e. It would take you a whole of 10 minutes to set this up and you could never look at it again.

If you did this, your average MER is 0.47%, while the MER of the Managed Index Income & Moderate Growth Fund-e, where they do the EXACT same thing, is 1.25%. They charge you 0.78% of your investment for 10 minutes of work once a year. In my case, I invest roughly $10000 per year. That's $78, or a whopping $468 an hour. Wow. That might not sound like much, but the solo approach won with 4.93% annualized return versus 3.92% for the Managed e-fund. A $100000 lump sum investment in 2003 would have foregone over $12 000 in gains. $12 000 for the privilege of pushing a few buttons for 10 minutes every year. That works out to $9000/hr. No wonder people give the financial industry a hard time.

Oh, and in case you're wondering the difference between DIY and TD Managed Balanced Growth, the most popular balanced fund in their arsenal? $18000 over 8 years from $100000. More poignantly, if you gave up the returns sacrificed to the management expense of the fund over a 40-year investment horizon, you would suffer dearly. Investing $5000 per year for 40 years at a rate of 3.04% (Managed) versus 4.66% (DIY) would cost you..........$175 000.

Investment Manifesto Appendix I: The GIC Approach

noreply@blogger.com (Pharmadaddy) — Wed, 24 Aug 2011 04:22:00 +0000

This is a followup to my previous post. I mentioned there that the clients in question were so distraught with the failure of their money to grow in the market that they wanted to move everything to GICs. It just so happens that someone else has thought of this already. His name is David Trahair, and he wrote an intriguing book called Enough Bull, that highlights just such an approach. Trahair, disgusted with the financial industry and the impact on investors of the Lost Decade (as 2000-2010 is now being called in financial circles), outlines, as the subtitle states, How to Retire Well without the Stock Market, Mutual Funds, or Even an Investment Advisor.

He introduces the concept of a GIC ladder and there is beauty in its simplicity. Let's say you have $100 000 to invest in 2003, like our fictional Mr. & Mrs. Smith. You take $20000 and buy 5 GICs, each maturing 1 year after the other. So you buy a 1-year, 2-year, 3-year, 4-year and 5-year GIC. For those who don't know, GICs are Guaranteed Investment Certificates, which, as they say, are guaranteed to pay you the stated interest rate each year for the term of the GIC. Typically, the longer the term, the higher the interest rate. The catch is you can't redeem it without penalty until the end of the term, but the bank rewards you for your delayed gratification by sweetening the interest rate.

Now, when the 1-year GIC matures, you sell it and purchase a 5-year with it. You do the same for the 2-, 3-, 4- and 5-years when they mature. Eventually you have five 5-year GICs. And every year, one of them matures. You sell it and purchase another 5-year GIC every year. This way, each year you are locking in a portion of your portfolio at the prevailing interest rates for that year.

How would such an approach work for Mr. & Mrs. Smith? I found the historical GIC rates from 1970-2011 and backtested such an approach. Of course the results are slightly boosted by the heady interest days of the 80s. But I don't imagine anyone was celebrating 17% GICs when they were paying 20% on their mortgages.

Again, I tested a $100 000 lump sum investment and compared it to a theoretical conservative index portfolio started in the same year. The results were rather surprising.

The index portfolio gained an impressive 9.6% per year, turning $100 000 into $4.3 million in 41 years. The GIC approach fared nicely as well though, coming in at 8.31% per year. While this may seem like a small difference, the magic of compounding ensures that the final result is drastically different. The final portfolio is valued at $2.6 million. Thus, the couple forgoes $1.7m in gains. Some might consider this a small price to pay for sleeping soundly for 41 years. And in case you're wondering, the GIC portfolio outpaced inflation which clocked in at 4.4% per annum.

What if this approach was taken by our fictional couple in 2003? No crazy interest rate spikes to rely on in this period. Did it still produce respectable results? Indeed it did.

$100 000 invested in 2003 in such an approach would net roughly 2.92% per annum, versus about 5% in a conservative index portfolio. They forgo about $25000 in gains. But they still beat inflation, although barely, at 2.05% per annum.

So if you are interested in GICs, I recommend reading Mr. Trahair's book...and treading cautiously. In the markets, nothing is never free. And that goes for risk and safety as well. With risk you pay with volatility. With safety you typically pay in the form of unrealized gains. But it all comes down to what you can live with. Just don't sell yourself short and follow two VERY important rules.

Rule #1: DO NOT buy GICs from the big banks. Their rates are AWFUL. Use INGDirect, Ally, or Achieva Financial. TDs current 5-year non-cashable GIC rate is 1.65%. Achieva is offering 3.5%, Ally 2.75%.

Rule #2: Don't run scared to GICs. Do it because it makes sense for you. If you still think investing in a broad-based portfolio of stocks and bonds is the way to investment success, then d it. Don't put your money in a GIC mattress because your adviser screwed you. Fire your adviser.

An investment manifesto

noreply@blogger.com (Pharmadaddy) — Wed, 24 Aug 2011 03:04:00 +0000

Two investors, Mr. and Mrs. Smith, who I know well, were bemoaning the performance of their mutual fund investments the other day. Back in 2003 they had a lump sum of money they wanted to invest. This money was by no means meant to sustain them in retirement as they were well away from it at that point. From speaking to them it's clear they wanted their money to grow a bit but deep down they are very conservative investors, evidenced by the fact that their desired approach now is to go all-in to GICs (I will discuss this in my next post). I've heard this story a ton of times from other colleagues, friends, and family members and the background info I collect is always the same.

They went to one of the Big Banks and used an in-house investment adviser. The individual seemed knowledgeable enough and showed them that with the specific fund he was recommending or the specific allocation created by the mix of funds he was using, they could expect a roughly 8% annual rate of return on investment. See my previous posts here and here to learn why this is only partially true. Then he invested their money and the rest is history. I'm not sure what funds he invested in or how often he changed the funds. But the fact that he was able to achieve 0% return on investment over an 8 year time frame is astonishing and pathetic. And exceedingly common.

What is the defense of advisers when questioned about these results? The Big Crash in 2008 did you in. When I heard this was the defense leveled in this particular case as well, I decided to dig a little deeper to answer 2 questions.

1. What was the return of a balanced portfolio of low-cost index funds with a lump sum investment starting in 2003 and ending today? Maybe this adviser merely matched the market.
2. Not knowing what funds he used, what is the likelihood of choosing such a poor portfolio given the investment needs and style of the clients?

Question 1:
Since the time period in question was marked by one of the largest stock market declines in history, it stands to reason that the more aggressively a portfolio invests in equities and less in fixed income funds, the lower the return should have been. The data bear this out. However, even the most aggressive mixed portfolio (35% Canadian equity, 32% US, 33% international) of low-cost index funds still yields a return of 4% annually. In order to achieve such dismal results, the adviser would have had to invest in 100% US equity which would have been absolutely idiotic. It is clear this was not the case but demonstrates the magnitude of failure.

Question 2:
What if the adviser knew nothing else than past performance? If he created a conservative portfolio of 60% bonds, 20% Canadian stocks, 10% US stocks, and 10% international stocks, as guided by the couple's investment style, he could pick funds in 3 ways as I see it. He could choose the top performing funds in each fund category for the years prior to 2003. Or he could choose the lowest performing funds (although this may seem ridiculous, in financial markets, battered investments usually rebound quite nicely). Finally, he could just recommend a balanced fund. This is one of those prepackaged funds made for investors with different styles. The Big Banks sell them and so do all the big investment houses. I've used TD in all my examples but only to make the data field manageable. But tellingly, back around 2003 I was in a similar situation to this couple and was recommended something similar by a TD adviser. More recently I was recommended the newest rendition of this product by a different adviser so it seems this approach is popular.

If the adviser chose the top-performing fund his company sold in 2003 based on past performance in each fund category (fixed income, Canadian, US, Intl) and purchased them and let them sit, he would have gained this couple 4.13% per year. If he picked the worst, only proving my previous point, he would have achieved 6.82%. And if he put them in TD Managed Income in 2003 and then switched it to the fund du jour in 2009, TD Comfort Conservative Portfolio, they'd be at 4.49%. Not too shabby in all cases. And the second example is quite remarkable given the market returns. But no bank adviser that I've ever met would try and sell a client on investing in the worst funds going even if it does make mountains of sense.

So here I was at an impasse. This man had clearly achieved the impossible. He had added no value to the investments for these clients. In fact, he had subtracted value. Could that be so? Could not some other reasonable selection method have led to this failure? What if he was cycling the portfolio? What if, every year, he reviewed the past year's performance in each fund category and changed what fund he had the money invested in based on which fund was tops, or conversely, which was in the can? Close, but no cigar. Selling everything and reinvesting in the top performing fund in each category from the previous year yielded a 5.65% annual return, 3.5% in the case of the worst funds. (This does not disprove my previous point as the performance he was assessing was only annual. Each time he purchased there was a good chance he was still riding a wave of success.)

But there must be a way to construct a conservative investment portfolio (assuming he cared even a little bit for his clients' investment style AND considering that even the most aggressive mixed index portfolio still didn't suck as bad as 0%) and completely strike out. Turns out there is....almost.

If I look in hindsight NOW at the worst funds performing over the last 10 years in each fund category for TD and construct a theoretical conservative portfolio with a $100 000 lump sum investment back on January 3, 2003 (as I did for all the projections noted through GlobeInvestorGold, of which I am a paid subscriber), I achieve a return of only 1.25%. Now this couple didn't tell me their return was 0%. They used the term "practically nothing". To many people, gaining only $10 000 on $100 000 (just using this for arguments sake) over 8 years would be considered just that, especially considering that the annual rate of inflation over the same time period was 2.05%. In real terms, they actually lost money.

But I digress. What are the odds of constructing such a disastrous portfolio? First of all, consider that there would have been nothing but chance guiding the purchase of these funds in 2003 as they were not really on the radar. Decidedly mediocre. Only in 2011 with the gift of hindsight can I truly see that they were awful.

Just for shits and giggles though, let's run the odds. To do this I must determine how many funds existed in each category with TD in 2003 and then multiply the odds together. For Canadian Equity it was 1 in 20, US Equity 1 in 16, International Equity 1 in 22, and Fixed Income 1 in 20. So to pick the lousiest 10-year fund in each category would require 1 in 140 800 odds. However, given the frequency with which I hear this story from other investors, this may well be one of the most common rare occurrences in our universe.

Either this adviser was incredibly unlucky, created a portfolio with an asset allocation that was so out of tune with the needs and desires of the clients, or churned the portfolio relentlessly to generate commissions. It might seem that in the first instance, the adviser could be forgiven. Sadly I'm not in a forgiving mood today. If he would have kept it simple by creating a conservative balanced portfolio with broad-based mutual funds (I won't be so daft as to suggest an in-house bank adviser would recommend index funds), purchased them once and just let them be, at absolute worst they'd be sitting at 4% annualized return. That is something I know that they could live with.

The important lesson from this story is that it really doesn't matter who Mr. & Mrs. Smith are, how much money they had to invest, their investment style, or which bank they used (or in a broader sense, with few exceptions, which financial adviser they used). The fact is that the same thing happened to thousands of Canadians in the last 8-10 years. But it all gets written off as normal. It's pushed aside as a natural result of investing in the equities market. "That's the risk you take with investments" we're told and we tell ourselves. But it's not. The fact of the matter is, not taking risk is just as, if not more likely to result in poor returns AND it is the very nature of the investment advice culture that creates poor returns. I hope to prove the last two points in two followup posts, so do please read on!

But what am I to do, one might ask. I don't have time to invest on my own. I don't have the knowledge. I vehemently disagree with both precepts on the basis of my own experience but I'm willing to concede the point because these topics interest me. Educating myself in these matters is not a chore, it's a hobby. That will not be the case for many. So here is my revolutionary manifesto for investors:

1. If you are relatively far from retirement or have a small portfolio, you may want to consider educating yourself. Or just do as little reading as is necessary to construct a Couch Potato Portfolio a la Money Sense (just Google Money Sense Couch Potato Portfolio and you'll be laughin'). The advice I give below would be so expensive for someone with a small portfolio, it would eat away most returns you may achieve. As well, many fee-only advisers won't look at small investors. Finally, in most cases, if the portfolio is small and/or the investors are far from retirement, there isn't a lot of complexity there and you should be able to figure out most of it on your own, with the help of some knowledgeable friends (none of whom sell mutual funds please).
2. If you are closer to retirement or have a large portfolio, or your retirement investments consist mostly of assets you will sell, you need professional help. I rail against traditional financial advice, but even I will be seeking help as I creep over 50. If you have a large portfolio, you can likely afford a professional fee-only planner. These people strictly offer financial advice. They sell no products so their advice is unbiased. Even if your portfolio is meek, if you are closer to retirement, you need assistance. Planning becomes much more complicated as you near the time when you will need to use your retirement funds. There are tax considerations, annuities, RIFs, estate planning, etc. etc. As well, as you get closer to retirement, you need to think about protecting what you've already built. All of this should be done with professional, knowledgeable, and unbiased advice. I'm willing to bet you'd miss out on at least 2 of those factors if you search for it at the bank. So don't. Check MoneySense for directories of fee-only planners. Or call around and find some. They're out there, though not in droves yet.
3. If you are at any stage, consider a sober second opinion. This is the option offered by Weigh House Investor Services. Check them out. They basically take a look at your portfolio and investment plans and tell you (although not literally) whether you are off the rails and need to fire your adviser or whether he's a damn genius and you should bring him brownies. Even if you are a DIYer like myself, they have a nifty DIY coaching program where they are there to help when you need it and review everything with you once a year, just to make sure you don't think you know more than you actually do.

Regardless of which option you choose, do yourself a favor. Either go it alone or hire someone whose paycheque does not depend on or is not partially composed of commissions and trailer fees from the products they sell. It's your money. You earned it. So don't let someone else piss it away.

R.I.P. Active Fund Management

noreply@blogger.com (Pharmadaddy) — Mon, 08 Aug 2011 01:48:00 +0000

As I promised in my previous post, I've analyzed whether the average investor can use mutual funds to produce market beating returns. You have to understand that most individual investors will rely on the advice of an investment advisor, whether through a bank or insurance company, to purchase their retirement mutual funds. Both my experience and the evidence presented in the previous post show that investment advisors are good at 2 things: chasing past performance and failing to pick winning funds.

So if it were 2004 and I were listening to an advisor, s/he might suggest I invest in one of the top 10 funds in each asset class based on the last 3 years performance. This of course assumes this advisor has at their disposal the whole universe of Canadian mutual funds, which would be a very rare thing indeed. Most advisors, particularly those at banks, sell only their company's mutual funds. That goes for insurance companies as well. If you deal with an investment house like Edward Jones, they have a slightly broader offering, but not the whole universe. In fact, to access all the funds I researched, you'd have to be with a high price broker or use an online discount broker. You'll see why that would make no sense though because you'd be better off just using the very small and easy to understand universe of index funds.

Here's my methodology. I analyzed the rolling 3-year returns of mutual funds in the following 4 asset classes: Canadian equity, US equity, international equity, and Canadian fixed income. I used the data at FundLibrary for this purpose. I then identified the top 10 mutual funds in each rolling 3-year period. For the period starting 2004 (3-year average of 2003, 2002, 2001), I looked at the rank of the top 10 funds for the 10-year return ending 2010. For the top 10 funds in the 10-year return, I looked at where they ranked back in 2004. So I'm looking for 2 things here. If you invested in the top performers in 2004, did they end up performing big over 10 years? Also, looking at the top 10 funds based on 10 year performance, would there have been a way for you to easily identify them back in 2004?

The main conclusion from my research is that playing the mutual fund game is like rolling at the craps table. For example, of all the asset classes, the exact average ranking of the top 10 funds is 5.5. What is the average ranking in the 10-year performance measure? 16.33. The whole group as an average moves down 11 ranks. But when you look at the distribution of the rankings you see how much of a mess it is. While they start from 1-10 in 2004, they end up ranging anywhere from 1-72 on 10-year return. And it's no different when you look in reverse.

The top 10 funds based on 10-year performance, if past performance is a true predictor of future performance, should have been very easy to pick out among the universe of funds in 2004. While the top 10 over 10-years are by necessity ranked 1-10, they started out ranked anywhere from 1-88. Not quite as bad odds as the lottery but worse than some casino games.

But what if you just invested in the top funds based on highest 3-year performance? I did as such using GlobeInvestorGold. I made a hypothetical portfolio with equal weighting for each of the aforementioned asset classes. I invested $10 000 each year for 8 years. In the end, I had a personal rate of return of 1.71% per year, or a dollar growth of $5797.

I then created a similar portfolio but using only low cost TD e-series Index Funds mimicking the same asset classes. The result? 2.12% per year, or a dollar growth of $7275.

Now you might be saying, what's 0.5%? Well, over a 40-year investment span investing $10000 per year, it'll cost you about $53 000. And, the above projection significantly underestimates the underperformance of the actively managed approach for a few reasons.

1. Investment advisors often convince investors to sell and buy frequently in order to churn up commissions. This increases fees and reduces returns.
2. As documented in John Bogle's book mentioned in my previous post, most investors (and their advisors for that matter) don't have the discipline to stay on cruise control. Trying to time the market and chase performance always leads to diminished returns.
3. The projection above used No-Load funds when possible because the database seemed to have more data for them. Most of the time, if individuals are purchasing these funds through investment advisors, whether they know it or not, they are either paying a front-end load (pay a % fee when buying the fund) a back-end load (pay when you sell) or a deferred-sales charge. This would reduce returns further.
4. The top performing funds in many cases had fairly high initial investments so are unavailable to many individual investors.
5. I'm willing to bet MOST Canadians get their mutual funds through one of the big banks. There were a remarkably small amount of top performing mutual funds sold by the big banks. If I did a separate study showing just funds offered by those banks, it would not be pretty.
6. A good portion of the top performing funds were index funds. They actually skewed the performance higher. If I were to remove them, it would push the cumulative returns lower. I decided not to for 2 reasons. 1, I was tired of looking at data. 2, realistically, those funds are part of the pool from which an investor has to choose. Unlikely an advisor would recommend them, but you never know. Stranger things have happened.
7. Finally, survivor bias. By definition, all the funds I looked at still exist today. That means they are at least semi-respectable at performing or they would have been sacked. In John Bogle's similar study to mine, of 350 or so funds that started out the study, roughly 75% of them ceased to exist by the end of the study. But in hindsight, I can't include their performance because the data to which I have access no longer lists them. Their presence would significantly skew the returns downward. The other notable finding from my research is how few mutual funds on offer in each asset class even have 10 years of data under their belt. That's because the industry has to keep coming up with new and improved funds to draw in investors.

The final obvious conclusion from this little experiment is, even if you assume none of 1-7 to be true, and the performance difference is only 0.5%, the fact that there is a performance difference at all in favor of passive investing should put the whole argument to rest. And I repeat: I literally spend 5 minutes of my time each month managing my e-Series index portfolio. No meetings with investment advisors. No sales pitches for tied-in insurance products. I have asset diversification and low cost investing all in one package. Plus, every comparison I've ever run on my investments against those recommended to me by investment advisors have come out in my favor. (And yes, some of those comparisons have run from the time the investor made the recommendation, not looking in hindsight.) And no, it's not something of which only I'm capable. All you need is a little bit of knowledge, some patience, and some discipline when the market starts doing funky stuff.

As a final note, given how terrible the investment climate has been since I started investing in 2007, one would think my portfolio should be in the red. Well, it's nothing to write home about, but it is sitting at a respectable 2.8% per year. The total market has seen a decline over that same period. However, my superior performance is clearly due to dollar cost averaging. If you simply look at $10000 invested in November 2006 in index funds versus the theoretical market, the market is up 1.90% (this "market" being 25:25:25:25 as above) while the indexing is down 1.26%. How powerful then that simply investing a set amount of money at regular time intervals can increase my annualized return from a negative to a positive? Don't try and time the market. Let the ups and downs fall where they may.

There you go. Average is within your grasp. And you don't need a financial planner to get there. You may need one for other financial matters, but most certainly not for the majority of your retirement investing. And if and when you do need one, stick with a fee-only planner. You work hard for your money, so why should you be so quick to hand it over to someone else to take care of that knows little more about investing than what you can read in books?

Educate yourself. It's honestly not that hard. Just subscribe to MoneySense Magazine and you'll be set. Seriously. I've done a lot more reading than just that but for most people MoneySense will completely enlighten you and help you take control of your financial future.

Aiming for Average

noreply@blogger.com (Pharmadaddy) — Sat, 06 Aug 2011 22:36:00 +0000

There are very few instances in life where I aim for average. I most certainly do not want to be an average North American bodyweight. I don't want my pharmacy to provide average service. And when I was in school, I was not satisfied with average grades. But there is one area where not only do I want to be average, but it makes absolute sense. Sadly, because there is so much money and marketing behind convincing the "average" citizen to perform well above average in this regard, my outcome is likely to be anything but average, if you catch my drift.

I speak of course of investing. Anyone who invests in mutual funds for their retirement either on their own or more likely through an investment advisor, needs to read this post. And since the source of my inspiration is "The Little Book of Common Sense Investing" by John Bogle, it follows that they should read it as well.

The aim of most investors and the pitch made to them by their financial advisors is to "beat the market". But if you do enough reading you will learn that it is next to impossible to do just that. I have written before on passive index investing and its advantages so I refer you to an earlier post on the topic here.

What I want to do here is to highlight a few key points in Mr. Bogle's book that really jumped out at me. Even though the author is preaching to the converted when I read this book I still found it fascinating mostly because he insists on doing something of which I'm a big fan: backing up his assertions with data. Someone new to the beautiful simplicity of index investing will likely be quite skeptical because their investment advisors have always told them different. And these are individuals we should be able to intrinsically trust, right? Sadly, most investment advisors are either woefully uneducated OR they are making recommendations that mostly serve to benefit them. A good test to see if you have a good advisor is to ask him or her if they recommend index funds. If they say no, go find someone else. And the excerpts from Mr. Bogle's book below will help convince you why. If they don't, take the book out from the library. It's a quick read but it will change the way you save for retirement and while you'll be aiming to do "just as good" as the market, you'll end up trouncing the Joneses.

On buying funds based on past performance, an issue I've also addressed previously here.
1. "In short, selecting mutual funds on the basis of short-term performance is all too likely to be hazardous duty, and it is almost always destined to produce returns that fall far short of those achieved by the stock market, itself so easily achievable through an index fund."
2. Quoting Nassim Nicholas Taleb, author of Fooled by Randomness. "Toss a coin; heads and the manager will make $10 000 over the year, tails and he will lose $10 000. We run the contest for the first year for 10 000 managers. At the end of the year, we expect 5 000 managers to be up $10 000 each, and 5 000 to be down $10 000. Now we run the game a second year. Again, we can expect 2 500 managers to be up two years in a row; another year, 1 250; a fourth one, 625; a fifth, 313. We have now, simply in a fair game, 313 managers who made money for five years in a row. And in 10 years, just 10 of the original 10 000 managers. Out of pure luck...a population entirely composed of bad managers will produce a small amount of great track records.
3. Quoting Ted Aronson, partner at money management firm Aronson+Johnson+Ortiz: "It takes between 20 and 800 years of monitoring performance to statistically PROVE that a money manager is skillful, not lucky. To be 95% certain...it can easily take nearly a millennium. Investors need to know how the money management business really works. It's a stacked deck. The game is unfair.
4. Quoting author Jason Zweig: "Buying funds based purely on their past performance is one of the stupidest things an investor can do." (To understand why this is so true, read my post linked at the beginning of this section, or do some reading on "reversion to the mean".)

On whether advisors add any value in choosing winning mutual funds:
1. A recent study by a research team led by two Harvard Business School professors concluded that, between 1996 and 2002 alone, "the underperformance of advisor-sold funds relative to funds purchased directly by investors cost investors approximately $9-billion per year."
2. Here's a real knockout punch from the same study listed in #1. "The study's conclusion: the weighted average return of equity funds held by investors who relied on advisers (EXCLUDING all charges paid up front or at the time of redemption [these are known as front-end or back-end loads, quite common in funds sold by advisors and would make the returns look even worse]) averaged just 2.9% per year compared with 6.6% earned by investors who took charge of their own affairs.

As an aside here, that percentage difference initially looks small. But let's assume for a minute that someone starts investing $10000 per year at age 25 and retires at 65. One individual trusts his advisor and invests in the funds they choose. They other goes it alone. Here is the difference in the value of their portfolios at age 65.
Advisor-assisted: $740 000
Self-directed: $1.8 million
So you essentially paid that advisor $1.06 million over 40 years to give you lousy returns. That's $26 000 a year. Not a shabby salary for him and the fund company but a real kick in the pants for you.

The last quote I leave you with is from the book discussing a unique study initiated by the New York Times in 1993.
"The editors asked five respected advisers how they would invest $50 000 in a tax-free retirement account holding mutual fund shares for an investor who had a time horizon of at least 20 years. The comparative standard would be the returns earned by Vanguard 500 Index Fund...By 2000, 7 years later, the Times reported their accomplishments. The hypothetical $50000 portfolios run by the advisers had turned in a profit, on average, of $88 500, ranging from $62000-$105000
...not one of these advisers was able to outpace the results of the Vanguard 500 Index Fund...$138 750. That is, the average adviser produced a paper profit on his portfolio of recommended funds that was about 40% less than the profit on the index fund...In mid-2000, the Times abruptly terminated the contest without notice."

Still not convinced? In my own experience, my simple portfolio of index funds purchased monthly and rebalanced annually that takes 5 minutes of effort every month has outpaced the recommendations of the adviser I fired 4 years ago by at least 5-10% in annual return. And when I went to setup an RESP for our newest addition I was confronted with the same old story by the in-house "adviser" (who has no more education than that offered by the bank and had less sophisticated knowledge about investments than myself). She was totally incredulous that I was using index funds and wanted me to switch to a Comfort portfolio, probably the worst form of mutual funds known as a Fund of Funds. That is, the fund itself holds various other funds sold by that company so you get hammered by the overarching fees of the fund itself and the hidden fees in the embedded funds. I politely declined and then she went on about its great past performance (which is pretty rich given that it was started at the nadir of the last stock market recession, so sure it looks damn good).

And finally, as a little thought experiment. What if I took the advice of MOST retail investment advisers to which most average individuals have access and purchased funds in my portfolio that have the best past performance? Starting in 2004, I'll identify the top 10 funds in each year for each of my portfolio asset classes, that is: Canadian Equity, US Equity, International Equity, Fixed Income. I'll then see where those funds rank in the subsequent year in terms of performance. My hypothesis is that they will show a stark and significant reversion to the mean. I will also run a hypothetical portfolio on Globeinvestor Gold to determine what would actually happen if I invested $10000, equally weighted into each asset class, each year and held the investments until present day. Stay tuned for the results.

Insight into the Obesity Epidemic

noreply@blogger.com (Pharmadaddy) — Sat, 23 Jul 2011 03:16:00 +0000

My sister forwarded me an excellent article from the New York Times on new research published in the New England Journal of Medicine. As I do in these instances, I accesssed the original research instead of taking the journalists word for it. Anyone interested in obesity and weight management and how lifestyle choices impact the course of weight gain over our life should read this.

What the authors did is look at the lifestyle choices over time of the individuals in three massive cohort studies (the Nurses Health Study, the Nurses Health Study II, and the Health Professionals Follow-Up Study). In total this included 98320 women and 22557 men. When all was said and done they had amassed 1.6 million person-years of followup. That is a lot of followup in case you're wondering. What they were looking for was which lifestyle factors were associated with weight gain over the study period. They wanted to know which ones were positively associated (if you do more of that thing you increase your rate of weight gain) and which were inversely associated (the less you do of that thing the faster you gain weight or the more you do of it the slower you gain weight).

The average weight gain across all three cohorts was 3.35lb per 4-year period, equating to 16.8 lb over a 20-year period. This about fits with the traditional knowledge that weight gain is not sudden but instead very sneaky, with the average person gaining 0.5-1 lb per year during their adult life. The really interesting stuff I highlight below. Enjoy.

1. Almost EVERY dietary factor was independently related to weight change, either up or down.
2. Dietary factors with largest positive associations with weight gain were, in descending order:
-potato chips
-potatoes
-sugar-sweetened beverages
-unprocessed red meats
-processed meats
3. The weight gain associated with increased potato consumption was due mostly to increased french fry consumption. In fact, FRENCH FRIES, OF ALL THE FOODS STUDIED, HAD THE STRONGEST POSITIVE ASSOCIATION WITH WEIGHT GAIN.
4. Weight gain associated with increased consumption of refined grains was similar to that for sweets and desserts.
5. Inverse associations (consumption of food goes up, weight gain goes down) with dietary patterns and weight gain were found for increased consumption of:
-vegetables
-whole grains
-fruits
-nuts
-yogurt
-in descending order, meaning that the more yogurt one ate, the less their weight changed, even more so than with vegetables; weird.
6. Lifestyle changes aside from diet had more modest impacts on weight change
7. Interestingly, ABSOLUTE levels of physical activity, rather than the changes in activity a person was doing, were not associated with weight change. Makes sense but goes against common wisdom. It doesn't matter how much exercise you do because you have adjusted your caloric intake to match it. What matters is if you start doing significantly more or less exercise.
8. Thanks Captain Obvious: Increases in alcohol use were associated with weight gain. Wow.
9. The sweet spot for sleep was 6-8 hours per night. More weight gain was seen with less than 6 OR more than 8 hours of sleep a night.
10. The impact of lifestyle changes did not seem to change depending on ones age or starting weight or BMI. Interesting. Never too late to change I guess.
11. I love this part so I'll just quote it verbatim:
"Some foods---vegetables, nuts, fruits, and whole grains--were associated with less weight gain when consumption was actually increased. Obviously, such foods contain calories and cannot violate thermodynamic laws. Their inverse associations with weight gain suggest that the increase in their consumption reduced the intake of other foods to a greater (caloric) extent, decreasing the overall amount of energy consumed. Higher fiber content and slower digestion of these foods would augment satiety, and their increased consumption would also displace other, more highly processed foods in the diet."
12. They are totally baffled by the finding that yogurt had one of the strongest inverse associations with weight gain. The authors suggest that the finding is likely confounded by some factor not accounted for by their study methods. That is, those who change their yogurt consumption habits have other weight-influencing behaviors that weren't caught by the study.
13. The study found that increased consumption of almost ALL liquids, with the exception of water and dairy, was positively associated with weight gain.
14. Dairy was neutral. Too bad for the dairy lobby.
15. The traditional "wisdom" on diet did not stand up in this study. That is, calories matter, but are not everything. In fact the quality of the diet seems to determine the quantity of calories consumed, not vice versa. Fat doesn't seem to make a hell of a lot of difference (no differences between whole milk and low-fat milk, nuts inversely associated with weight gain even though they're incredibly high in fat). High energy density foods aren't always bad (nuts are very high energy density, low density beverages were associated with weight gain). And refined carbohydrates caused weight gain regardless of whether the sugar is added (sweets and desserts) or not (refined grains).
16. Between 1971 and 2004, the average dietary intake of calories in the US increased by 22% for women and 10% for men, mostly due to increased intake of refined carbs, starches, and sugar sweetened beverages.
17. A habitual energy imbalance of 50-100 calories per day is sufficient to cause weight gain in most individuals. This means unintended weight gain occurs easily but, conversely, that modest, sustained changes in lifestyle can mitigate or reverse this imbalance.
18. Not once did they mention in the article that any of these things were associated with weight loss. ALL of the cohorts gained weight over the study period. It did not in fact say that if you eat more fruits and vegetables you'll lose weight, you'll just gain LESS over time than you would have otherwise. We'll see what the media does with this one.

Reference

Mozaffarian D, Hao T, Rimm EB, Willett WC, Hu FB. Changes in Diet and Lifestyle and Long-Term Weight Gain in Women and Men. N Engl J Med 2011;364:2392-404.

The myth of right-wing fiscal responsibility

noreply@blogger.com (Pharmadaddy) — Mon, 25 Apr 2011 16:06:00 +0000

During this Canadian federal election, I've been utterly dismayed but what seems like the Canadian electorate completely ignoring everything the Conservatives have done so far. Any time I ask Conservative supporters or those leaning in that direction, how they can possibly think of voting for Harper's team, I'm met with an almost universal response: they're the least of 3 evils. One colleague commented thusly: "I don't share the political values of the Conservatives but I just can't vote for anyone else because they'll just raise taxes and spend all our money. The Conservatives, although they've done some questionable things in Parliament, are the only ones I can trust with taxpayer money."

This seems to be a common conception. I set out to determine whether it is valid.

Consider before delving into this discussion what the cost of the accumulated federal debt is to the average taxpayer. It currently stands at $30.66 billion, costing the average Canadian $16383 per year. Public debt charges currently account for 10% of government revenues.

The question: Are Conservative governments better at managing federal finances than Liberals? (Unfortunately we have no precedent to evaluate the fiscal responsibility of further left parties such as the NDP as they have never formed the federal government.)

Hypothesis: The Conservatives are actually considerably worse at managing our nations coffers, despite their fiscally conservative policies. My impression is that although they speak to responsible fiscal management, they are unable to deliver. I also have some empirical evidence on which to base my hypothesis. The article to which I've linked shows, among other things, that right-wing (read: Republican) Presidents of the US have managed federal finances worse than Democratic presidents (although further to the left than the Republicans, one could not call them leftist; they likely sit right of Canadian Liberals). However, the impression in the States was the same. Republicans are fiscally conservative so, by extension, they must manage finances better. The data show quite the opposite. Since the author looked not only at the impact of each government on federal debt (that is did they run a deficit or surplus each year) but also deficit or surplus as a percentage of GDP (governments ruling during times of economic crisis will have a harder time balancing the books so this rules out the effects of broader economic factors) and the impact of each government on the GDP (that is did GDP increase or decrease during their tenure).

Methods: I looked at the fiscal results of all Canadian federal governments since 1922. I chose this date for two reasons. First of all, this is the point at which women received universal suffrage in Canada so the governments were a better representation of the electorates will. As well, most economic data I needed to utilize did not go further back than this point. For the Parliaments prior to 1999 I had to access the archived budget speeches for each year and extract the value of the federal deficit or surplus. I then converted this number to constant 2011 dollars using the Bank of Canada's inflation calculator. For 1999 to present, the Department of Finance has consolidated financial statements online which made it relatively simple. I put all these figures alongside the prime minister and political party in government at that time. I also included the gross domestic product for each year in constant 2011 dollars. This served to determine whether the increases in deficit were either due to economic decline or, conversely, whether the spending was done efficiently enough to induce economic growth. Whatever the case may be, standardizing the deficits or surpluses against the greater economic measure of GDP allows a comparison that comes closer to apples-to-apples. Finally, I also looked at disposable income per capita in 2011 dollars since 1961 (earlier data is difficult to locate). This helped me determine whether, although Conservative governments may run higher deficits, maybe it is better for the voters pocket. That's the reason many people vote Conservative. "They'll cut taxes and the size of government so I'll have more money in my pocket which will in turn help stimulate the economy."

Results:

Let me summarize by saying that everything you assume about Conservative management of federal finances is wrong, unless you hold assumptions contrary to the greater public.

First off, let me say that since the 1920s, Canada is a decidedly Liberal nation. Of the 89 years since 1922, Liberals have been in office roughly 70% of the time. However, in the short time they've been in office the Conservatives have done considerable damage to the nations financial situation. 90% of their years in office resulted in deficit compared to 60% for the Liberals. The raw size of the Conservatives average deficit was $22 billion compared to $7 billion for the Liberals. The size of their deficit on average accounted for 3% of GDP compared to roughly 1% for the Liberals (if you take out 4 years of the Second World War where deficit financing accounted for roughly 20% of annual GDP; even if you include those years, Liberals still have smaller deficits at 2.3% of GDP).

As well, even though they've only been in office 30% of the years since 1922, the Conservatives have been responsible for roughly 70% of the accumulated public debt.

Let's finally consider whether all of this has occurred for greater economic growth or increase in personal disposable income for Canadians.

Of their years in office, the Conservatives experienced only 1.1% annual GDP growth versus almost 6% for the Liberals. And the final nail in the coffin: Conservative governments have caused inflation-adjusted increases in disposable income of only 1.6% annually versus 2.6% for Liberal governments.

Conclusion:

Based on the data since 1922, it appears that if we want to get our financial house in order, we need to reconsider our perceptions of Conservative fiscal management. This says nothing about which way you should vote. But if you want to vote strictly on an economic or financial basis, you might want to reconsider putting an X next to the Conservative candidate. And in case you think the current manifestation of Conservative deviates from the past, consider this. After Brian Mulroney accumulated the debt to over 70% of GDP, the Liberals under Chretien and Martin slashed it to roughly 35% of GDP. Once Harper took over, it started back on the upswing.

UPDATE: IN RESPONSE TO A COMMENT BY A READER, I AM INCLUDING MY SOURCES BELOW. NORMALLY I DO THIS BUT I NEGLECTED TO THIS TIME. I APOLOGIZE.

FISCAL RESULT DATA:
1. SPEECHES OF PAST BUDGETS PRESENTED IN PARLIAMENT.
http://www.parl.gc.ca/parlinfo/compilations/parliament/budget.aspx

2. ARCHIVED ANNUAL FINANCIAL REPORTS FOR 1999-2004.
http://www.fin.gc.ca/purl/afr-archives-eng.asp

3. ANNUAL FINANCIAL REPORTS FOR 2005-2010.
http://www.fin.gc.ca/purl/afr-eng.asp

GDP & DISPOSABLE INCOME DATA:
All from StatsCan through CanSim, the paid database of StatsCan. I have access to it through my University library for free.

Nuclear debate

noreply@blogger.com (Pharmadaddy) — Sun, 27 Mar 2011 02:41:00 +0000

Anyone wondering what to think of the nuclear crisis in Japan should check out the following articles. One is pro-nuclear, one pro-renewable, and the other is an infographic giving some perspective on radiation dose, a poorly understood concept in the public arena. Enjoy!

Pro-Nuclear: Why Fukushima made me stop worrying and love nuclear power: George Monbiot

Pro-Renewables: George Monbiot is wrong. Nuclear power is not the way to fight climate change: Jeremy Leggett.

Infographic: Radiation doses. This is really cool. If you don't want to do any reading, check this one out. It is very informative and really puts things in perspective.

Nuclear impact

noreply@blogger.com (Pharmadaddy) — Thu, 17 Mar 2011 02:33:00 +0000

I'm not going to comment on the nuclear crisis in Japan because it is a very emotional topic. However, I will make a more oblique statement on the economic impact of the crisis that seems counter-intuitive. When the earthquake first hit Japan, oil prices took a quick dive. The inclination was that if the 3rd largest oil importing nation in the world has suffered a catastrophic natural disaster, their demand for oil will plummet, and so, in turn, will the global demand for oil, thus driving prices down. This seemed a bit shortsighted to me at first given that Japan has never been a society to stand idly by and lay down to adversity. They rise up stoically against the challenge. When Japan cleans up and rises out of this disaster their demand for oil may be even more voracious than before given the massive reconstruction effort that will inevitably ensue.

Then the nuclear crisis began to unfold and now there will be a new potential upward demand pressure on oil. If public fear is allowed to rule the day and the nuclear industry experiences another downward spiral of construction and productivity, the ambitious plans of Japan to provide 50% of their electricity needs with nuclear generation will be thwarted, regardless of how appropriate or not they may have been. Thus, a nation with absolutely no natural hydrocarbon resources at its disposal will be even more reliant on imported oil than it was before the earthquake. If the fear reverberates around the global nuclear industry and stops expansion plans in countries as diverse as Germany and China, many of which made those plans because they have few available hydrocarbon resources, the global oil demand will only increase.

Call me crazy, but I'm predicting $200 a barrel oil before my oldest is in high school.

Personal Rate of Return

noreply@blogger.com (Pharmadaddy) — Mon, 21 Feb 2011 05:07:00 +0000

I'm reading an interesting book by David Trahair called Smoke & Mirrors: Financial Myths That Will Ruin Your Retirement Dreams. Even with all the financial reading I've done, I'm learning quite a bit. Anyone who has a financial adviser paid by commission or one working at a bank needs to read this book.

One of the first things I was interested to read was that I can calculate my personal rate of return on my investments using Excel! It has a nifty formula called XIRR. You plug in all your dates of investments and their cost and then the existing value of your portfolio on this date. It spits out your annualized rate of return over that period. I decided to take this on.

I'm currently doing an analysis of what approach is better. The one he espouses in his book, or the one we're currently following. Currently we invest in RRSPs and put extra money on our mortgage. Kind of a compromise. He recommends not putting any money into RRSPs until ALL your debt is paid down, including mortgage. The argument is that paying down debt is a guaranteed rate of return. So I'm doing what I always do in these cases and running complicated financial projections on Excel that will take me close to 2 hours, probably just to find out I don't want to change what I'm doing. Why do I do this to myself? Is there a disease label for people who overanalyze everything?

Anywho, I was delighted to calculate my personal rates of return. It was a pleasant surprise given the hammering our funds took last year.

In my RRSP, since about 3.5 years ago, we have an annualized rate of return of 6.5%. My portfolio is 37.5% Canadian, 25% International, 25% Fixed Income, and 12.5% US. Comparing that rate of return to a similar portfolio made up of the indexes shows that I'm handily beating the index which sits at a 3-year annualized return of 0.54%. Since my portfolio is constructed entirely of TD e-series Index Funds most of that difference is likely due to dollar-cost averaging. We kept investing the same amount even when the market was in the dumps.

Other rates of return:
Sarah's Spousal RRSP: 3.0%; not as great but dragged down by early mistakes
Sarah's Personal RRSP (invested way back when we were students and had some extra money around): 1.3% That's the value you get from banks my friends.

RESPs
Sacha:15.5%. Wow. He benefited from us starting this right when the market was at its lowest. Not on purpose, just lucky.

Kees: 16.79% Again. Wow. Sure shows the value of timing considering the asset allocation in my fund and the boys RESPs is the exact same.

Oh, and just for funsies, of the 1003 mutual funds GlobeFund lists as Global Equity Balanced (that is, roughly similar portfolio allocation to me), only 3 bested me on 3-year annualized return. And of those 3 none of them had Canadian assets. Of the funds with Canadian assets, NOT ONE returned higher than me. And I'm not even getting paid to do this. Nor should I. It's really not that hard. That's the thing that makes me sick about the investment industry. A bunch of people getting paid too much to take too much from you and turn it into too little.

Do yourself a favor. Pick up this book and use it as your starting point to educate yourself about personal finance and investing. Yes it will take some time but you'll save yourself a bundle. At the very least, find a fee-only financial planner. Ditch your banker.

Are we that dense?

noreply@blogger.com (Pharmadaddy) — Fri, 18 Feb 2011 23:37:00 +0000

I was sad to read on Tuesday that the Edmonton city centre airport is essentially dead. I never gave it much thought until my wife and I were airlifted from 500km north of Edmonton to the Royal Alexandra Hospital so she could be treated for late pregnancy complications. The trip would have been close to an hour longer had we landed at the International. Same can be said for when her and our premature daughter were transferred to Grande Prairie. Instead, the driving time to and from the hospital was a mere 5 minutes.

As much as this disappointed me, I was happy to see that Edmonton city council is at least going to do something progressive with the land and reverse the pattern of development over the last 15 years that has seen Edmonton sprawl to absurd proportions. The development will see 30000 housing units built INSIDE the existing city. High density development is more ecologically sensitive and leads to more livable cities. Unfortunately, if planning principles aren't changed this will be a one-off rarity. Why is it that 75 years after the Greater London Regional Planning Committee legislated a greenbelt around London, North American municipalities, with few exceptions, have still not figured out the benefits of this arrangement?

The Metropolitan Green Belt allowed the purchase of land around Greater London that would be restricted to commercial and residential development. As such, the area of Greater London has been perpetually restricted to 1623 square kilometres. The demarcation is easily seen in the path of the M25 ring highway around the metropolis.
The area is officially referred to as the Greater London Urban Area. It has a population of roughly 8.5 million individuals and a population density of 5240 people per square kilometer. If Edmonton had the same population density it could fit 3.6 million people. Now some of you might cringe at that number. But consider the inefficient manner in which resources are used when individuals are spread out as much as they are in Edmonton. Before I elucidate some of the benefits of higher urban population density, let's consider other major urban areas in Canada. You will see that a dispersed populace is by no means ordained in Canada's cities.

1. Toronto
3972/km sq.
2. Montreal
4439/km sq
3. Calgary
1360/km sq
4. Ottawa
2207/km sq
5. Mississauga
2545/km sq
6. Winnipeg
1365/km sq
7. Vancouver
5335/km sq

The most densely populated city in Canada is Vancouver and it has a population density similar to that of London. According to Mercer's Quality of Living Index that ranks world cities by their livability, Vancouver is tops in Canada. It also received the honor of Most Livable City in the World by The Economist. The other highly ranked cities in Canada are Ottawa, Toronto, and Montreal, all falling in the top 25 on the Mercer Index. (As an aside, Toronto is a bit of an outlier. Although it may be livable, it's unfettered sprawl has led to the destruction of some of the best agricultural land in Canada. Had we planned ahead, Toronto could have come to rival London as one of the world's great cities.)

If you look at all the highest ranked cities in the world it appears the relationship is not straightforward, but more U-shaped. That is, there seems to be a sweet spot and it runs right around the 3500-6000 people per square kilometer. Obviously you'd reach a certain point at which you just couldn't fit any more bodies in an area without damaging living conditions. But there is certainly an argument to be made for more densely populated metropolises.

Before considering the advantages of this approach though we must fairly consider some of the advantages of urban sprawl as it has been practiced in the Edmonton-Calgary corridor and many other urban areas in North America. If it weren't advantageous for at least someone, it never would have been implemented. It does indeed lead to lower land and real estate prices, making housing more affordable. London has some of the most pricey real estate in the world. It does reduce traffic congestion significantly and leaves more space for wide open green areas within cities. Finally, it opens more land for development, thus encouraging investment and economic growth.

However, all of this comes with a lot of baggage and this baggage weighs down the argument in favor of concentration, not sprawl. First off, consider that suburbanization is essentially unsustainable in that it relies on a bygone era of cheap energy. Sure, energy still seems relatively inexpensive, but it won't last. Consider the recent leak from Saudi Arabia that their oil reserves are in reality 40% less than has been officially reported for many years. And a new report in The Guardian shows that it is not just turmoil in the Middle East and North Africa driving oil prices higher these days, but more chronic systemic factors. But, even if it were sustainable, would it be a good idea? Not really.

Suburbanization and sprawl cost money. A lot of money. Spreading municipal services over such a large area is costly. Public transportation is near impossible to develop efficiently. Sure, traffic congestion goes down, but travel time is higher given the increased distance. And since everyone is almost 100% reliant on their automobiles for travel, carbon emissions are much higher.

And let's talk about real estate. Sure, it is awfully nice that sprawl can keep property prices low. But look at the lifestyles this has spawned. Since houses were so "affordable" in the 2000s out in the suburbs, everyone and his dog bought one. But they needed a car to get to the job in the city that helped them pay for their house. Add up the mortgage and the car payment and all the gas commuting back and forth, and you already have one heck of an expensive lifestyle. Where did that lead us? The housing crash. Now you have crumbling suburbs in Florida and even the degradation of the uber-planned Disney community of Celebration. Maybe highly priced real estate isn't such a bad thing.

With London's restriction of sprawl, it now has some of the highest priced commercial real estate in the world. Finite land means development is forced inward and, just the same, supply is limited. As demand rises but supply remains the same, prices rise in step. Consider One Hyde Park, an upscale development built overlooking the iconic Hyde Park in London. Actually, to call it upscale is an understatement. Four penthouses have already been sold at 135 million pounds each ($216 million) and the average price per square foot of living space is 6000 pounds ($9600), making it some of the highest priced real estate in the world.

I remember talking to a gentleman at the London Symphony Orchestra. He was about our age at the time and he was talking about the high prices of housing within London proper. He lived on the south end of the city, within the confines of the Green Belt. Because of it's relative distance from the City of London (the financial district) and high priced buroughs like Westminster (the touristy area), Kensington and Chelsea, and Hammersmith and Fulham, the area had more affordable housing. But even if it were at the very edge of the city boundaries, it'd be only 20 kilometers from the City. Consider a southern borough named Merton, at the end of the Tube line. Just a little shorter than Edmonton city centre to St. Albert. The difference being? You can hop on the tube in Merton and be in the heart of the City of London in 30 minutes, even in the heart of rush hour. Check the Tube site. I'm not lying. Try getting from St. Albert to Edmonton City Hall in 30 minutes during rush hour. And you won't be able to read on the way either.

I spent a week visiting London, which is certainly not a long enough time to form a full impression of the city, but I can tell you, if I had to choose between it and Edmonton, I'd pick London. If my family were only a 30 minute drive away, that is. But even between Edmonton and Vancouver, I'd go with the latter. Densely populated, well planned cities like Vancouver, London, and Paris, have a certain je ne sais quoi, a certain energy that you can't explain but feel every moment you're there. Edmonton could have that if we plan it right.

I sincerely hope Edmonton city council is signaling a new direction for urban planning in the city I called home for many years. If so, it would be a sea change for urban development in the Canadian prairies, and could pull Edmonton far out in front of Calgary in terms of an attractive place to live. If not, it's going to come back to bite them many years from now when the era of cheap energy ends.

(Of course, this is all very rich coming from a guy who chose to settle down in a town of 7000 people with a population density of 254/km sq.)

Your average meal

noreply@blogger.com (Pharmadaddy) — Fri, 18 Feb 2011 21:23:00 +0000

Some estimates suggest that your average restaurant dish contains twice as many calories as should be consumed in one sitting. After writing my previous post on Boston Pizza's misleading nutritional guide, I decided to sit down with it and determine how much I used to consume when I ate there.

When I used to eat out, I treated it as a one time indulgence, even if it happened once a week. So I would have an appetizer, main dish, and dessert. And if I didn't know better, I would still do that, as do many others. When I see other diners eat at restaurants, this is the behavior they demonstrate. And I suspect this is the eating pattern of most North Americans, 75% of whom eat out roughly once per week, if not more. So how many calories would I consume if I ordered what I WANT to order at Boston Pizza?

Cactus Cut Potatoes (shared with one other person)
415 calories
Buffalo Chicken Sandwich
910 calories
Side order of fries
250 calories
Chocolate Brownie Pudding with Ice Cream
570 calories

Total caloric consumption=2145 calories
More than 500 calories over my entire DAILY limit

Even just with the sandwich and fries I'd be almost at my daily limit

Now, in fairness to Boston Pizza, they do have some healthy choices, and they even label the caloric content of their Delicious Alternatives Menu right in the menu. Some of their moderate-calorie choices are even surprising, like the Baked Seven Cheese Ravioli that rings in at 470 calories. The real problem with their food is not the food itself, but the serving sizes.

I've watched my father-in-law polish off the Boston Smoky Mountain Spaghetti & Meatballs. It is an absurd amount of food. To be fair to him, he is chronically normal weight and can't seem to gain weight even if he tries. But most people aren't blessed that way. If they polished it off they'd consume 1800 calories. The average individuals daily caloric limit.

So, as with any other restaurant excursion, here are some rules to consider:

1. No appies and no desserts.
2. No alcoholic drinks or pop. Stick with water or coffee.
3. Have half of your main dish packed up right away.

Of course, that doesn't mean you can indulge on truly special occasions like your birthday or anniversary. But if you are looking at weight control or weight loss, it better not be too often. And for those of you who think you can exercise your way out of this one, think again.

If I ate what I wanted to, I would have consumed 1600 calories more than I intended. To burn that amount off with exercise that I enjoy, say, jogging, I would have to go for a 6 mph run for 2 hours. Good luck with that.

Weight a minute

noreply@blogger.com (Pharmadaddy) — Fri, 18 Feb 2011 19:54:00 +0000

I've given up on Weight Watchers new PointsPlus program. I was following it diligently for 3 weeks and did not lose a single pound. Whereas before on the Points program I would have lost 3-6 pounds based on past experience. So I went to LoseIt!, a free online weight and food tracking program that you can also buy as an App on iPhone or iPod Touch. It's very popular and works strictly on calorie tracking. I'm still going to attend WeightWatchers to weigh in, because I don't have to pay once I'm back below 165. But I plugged my Weight Watchers tracking into LoseIt! and even though the WW PointsPlus value was the same each day, it could swing as much as 500 calories up or down per day. That's a huge difference considering 3500 calories in excess puts on 1 pound.

However, I have run into an unexpected challenge. I'd been alerted to the issue of inaccurate caloric information on food labels and restaurant nutrition guides by Dr. Freedhoff over at Weighty Matters. I took my boys out to Boston Pizza today. I always ask for their nutrition guide because, quite frankly, they have some pretty grim menu items as far as calories are concerned.

I ordered the Delicious Alternatives Chopped Chicken Salad, and because I felt like them, a side order of fries. My calorie budget per day is 1620 kcal. Thus, I try to aim for about 500 cal per meal, leaving a bit of wiggle room. My choices, according to the nutrition guide, put me at 530 cals. Perfect.

When my fries came, I knew something was up. It was a full-size dinner plate heaped to the ceiling with fries. I promptly split the plate in half and had the other half packed up. When I got home I did a little experiment and weighed the fries.

The nutrition guide puts a side order of BP fries at 157g with 250 calories. Actual weight served to me? Almost 300 grams. Just under double the serving size listed in the guide. Had I not noticed how large the serving was, or not known any better, I would have unwillingly consumed 250 extra calories. Ouch.

I guess it's a good thing in a way because it means their food isn't 100% standardized and prepackaged. But it still makes keeping under a daily calorie budget a little tough.

Jeff Rubin's at it again

noreply@blogger.com (Pharmadaddy) — Wed, 16 Feb 2011 16:46:00 +0000

If you haven't read the book Why Your World is About to Get a Whole Lot Smaller, by Jeff Rubin, you should. Rubin is former chief economist with CIBC World Markets who correctly predicted triple digit oil prices in 2007-2008 and foresaw the ensuing deep recession and plummet to low double digit oil. He is a proponent of peak oil theory and provides ample evidence to support it. The true value of the book though is the prediction of what our world will look like when the economy catches up to the reality of world oil supply. Definitely food for thought for all of us who have an environmental footprint equivalent to 8 human beings and have been living lives propped up by cheap energy for so many years. One of the arguments against peak oil always comes from Saudi Arabia. Opponents argue that the Saudi kingdom has so much oil we won't hit a peak for a very long time. As has been predicted by Mr. Rubin and many other proponents of peak oil theory, turns out the numbers have been fabricated for quite some time. You could expect as much from a tightly controlled autocratic kingdom that relies on a global perception of freely flowing oil to maintain its economic clout. Check out the goods at Mr. Rubin's blog.

Exercising to lose weight? You're wasting your time

noreply@blogger.com (Pharmadaddy) — Wed, 16 Feb 2011 16:44:00 +0000

I'll just direct you to Dr. Yoni Freedhoff's comment on the matter over at Weighty Matters. Enjoy!

What I've Learned from Investing

noreply@blogger.com (Pharmadaddy) — Thu, 20 Jan 2011 04:51:00 +0000

As earnings season approaches, I'm excited to see three stocks I hold continue an upward march. Google, Home Capital Group, and Schlumberger have all seen 10% increases in the last week and are marching very close to the target prices I set for them almost 2 years ago. At the same time, I chose 3 other companies as well on the basis of a screen I developed after extensive research and after performing a detailed valuation of the companies that resulted from the screen to find the 6 trading farthest below their intrinsic value. This process took a long time but so far has been quite successful, with the exception of one company.

In March 2009 I purchased equally weighted amounts of Home Capital Group, Research in Motion, Intuitive Surgical, Google, Apple, and Schlumberger. It was my first foray into the stock market (aside from mutual funds and index funds) so I wanted to play around with a small figure so just used $500 for the whole kit and caboodle. I trade through Canadian Shareowner Investments, a co-op trading firm that allows investors like me to buy fractional shares in companies. For companies like Google, for example, you'd have to fork out multiple hundreds of dollars for a single share. With CSI I can just choose a dollar figure and I own a fraction of a share in conjunction with other investors. The only disadvantage is the trading fees are a touch higher if trading one security at a time and the if you want to pay the lower fees, the sales only occur on set days. So if your stock is real high and you think it's going to drop real low quick, it's a little nerve wracking to place a sell order and know it won't be final for 20 days!

So here's how I've done so far. My first success story was Intuitive Surgical, a manufacturer of sophisticated surgical equipment like laparoscopic and robotic equipment. I purchased it at $100.46 in August 2009. Exactly 5 months later it hit over my target price (what I calculated to be the intrinsic value of the company) so I sold it at $223.11. Including fees this worked out to a 76% increase. Not too shabby! But, 18 months later I have learned lesson #1. I have been taught from my reading that once a company hits your target price, it should not trigger you to immediately sell. You set a stop loss 10% below your target price and a new alert at 10% above. If it drops 10% you sell it. If it rises 10%, you reset your stop loss targets 10% below the new level and so on, until you see a dip. Had I been patient and not jumped at the excitement of gaining 76% in 5 months I would have sold it at $328.77 almost exactly a year later (based on the price history since I sold it). That would have meant a gain of 172%. So, lesson #1=PATIENCE.

I originally purchased Apple at $115.18, pegging its intrinsic value around $210. This time I was patient and when it hit its target I held on. It eventually rose above $260 before dipping enough to trigger me to sell it at $258.75. With fees included my gain was 56% in 16 months. Again, not too bad for a newbie!

After this I was pretty excited for more success. Unfortunately, since then things have been pretty slow. I also made the potential mistake of plowing my returns to date into the poorest performing stock at the time after revaluating it and finding it was still trading well below valuation (Research in Motion, by the way). It has gone up somewhat since then but it has a LONG way to go to hit my valuation! That was lesson #2. Next time I do this I'm going to take out my winnings, buy a safe ETF with them, and then by a whole new batch when the last one sells.

Right now, 3 of my remaining 4 stocks are doing VERY well. Home Capital and Schlumberger have now past my target and are just being watched closely to see when I should sell. So far they seem to just keep going up. At worst, I'm looking at gaining 110% on Home Capital Group and 85% on Schlumberger. Google is marching steadily onward to my target price and currently sits at a 60% gain. RIM endlessly angers me and is in the doldrums at -20%. Damn.

Oh well, even if I were to sell all of them now (which I won't do: see lesson #1), with all fees included, I would still sit at a 39% gain. Not too bad for someone starting out from square one! If I had put the same asset allocation (%CDN:%US) in TD e-series Index Funds (which I do with my RRSPs) I'd be at roughly the same gain, so I'm happy with that. Most professionals can't even beat the index so I'm happy to be 0.5% below it. Plus, now the fees for CSI are lower and I haven't actually sold all my stocks yet, so I'm hoping I can best the market!

I do it mostly for fun and the challenge. I'm not going to get rich on it. My getting rich scheme is slowly socking away significant savings in an index fund portfolio. Pretty boring, I know!

New Years Resolutions

noreply@blogger.com (Pharmadaddy) — Tue, 28 Dec 2010 05:40:00 +0000

I've never done them. Ever. They don't work. I work in retail pharmacy, an industry that arguably is the only one to see higher sales in January than in December. We have so many people buying vitamins, minerals, herbals, detox kits, weight loss pills, etc. to realize New Years Resolutions. The sad thing about New Years Resolutions is that the majority of them crash and burn. Weight loss is the most common of course. The first Weight Watchers meeting after January 1 is standing room only. In obesity treatment circles we say that a diet consists of the least amount of calories and most exercise that a patient can tolerate. A healthy lifestyle is the least amount of calories and most exercise a patient can enjoy. That is, there is no point making any lifestyle change unless it is something you can continue forever. Going to the gym 5 times per week at 6:00 am is not likely to be one of those unless you are a fitness buff to begin with. So this year, do yourself a favor. Don't make any New Years Resolutions. Instead, aim to make small, sustainable changes in your life every day of the year that will accumulate into a healthier you by next December.

In the meantime, if you're feeling like some self-masochistic exercise, I dare you to do this workout and not feel like you want to die at the end. (Yes, the freeze frame is purposefully provocative.)

I am officially a Bodyrocker

noreply@blogger.com (Pharmadaddy) — Wed, 22 Dec 2010 05:47:00 +0000

It's amazing the things you find while randomly perusing Youtube. I was watching a hilarious video of Cookie Monster doing vocals for Rammstein's Du Hast when I saw an intriguing thumbnail on the side. I will openly admit it was not the subject matter that intrigued me. Anyone who sees this video will understand why I originally clicked on it. I'm not going to sugarcoat it people.

Now, aside from the obvious visual candy this video provides, I must say I was interested in this concept. I really do enjoy working out but I HATE weights, I don't want to go to a gym because it just won't happen, it's too damn cold outside to exercise outdoors, treadmills and ellipticals bore me, and a man can only do so many pushups and situps before he dies from boredom. So the thought of having a nearly endless smorgasboard of bodyweight exercises I can do in my own home makes me salivate. (Okay, maybe it's the scantily clad instructor causing the salivation, but I need motivation so I'll take what I can get.)

From where does the impetus for this come might you ask? Well, if you recall, I did a post exactly two months ago on getting back on track with Weight Watchers. It hasn't turned out so well. I had one good week and then it all went to hell from there. I have been baking for about the last month at least twice a week to produce this cornucopia of sweetness.

I bake every year at this time. I love it. It relaxes me and I give away a bunch of goodies to friends and family. But I INSIST on the highest quality in my finished product which means a LOT of quality control. That translates into my pants fitting quite snug. I got a little bummed out when I looked in the mirror the other night. Yes, men have body image issues too. Well, at least some men. My bigger concern though is what the image represents. Love handles are more scientifically known as central adiposity and they are a significant risk factor for cardiovascular disease and diabetes. See below for more on that.

So I thought, I'm going to become a Bodyrocker. Not only am I going to get my ass back on track with Weight Watchers (I know how to do it, I just have to smarten up and actually do it and realize finally 20 pounds later than I'm not invincible anymore) but I'm going to get in shape. Honestly, working with people with diabetes, cardiovascular disease, and metabolic syndrome every day makes me really want to get in shape so I'm here to see my grandchildren grow into adults. And I also realized, after feeling to keep my weight off for more than a year, that keeping your weight off WITHOUT exercise is next to impossible. The scientific evidence supports that and I loves me some scientific evidence, but when it comes to my personal life I usually turn a blind eye to it.

I started with Bodyrocks Absolute Beginners series that you can get on Youtube. Then once I slaughtered myself doing that I am now joining in on her nightly exercises. They are different every night and usually fairly short, like 20-30 minutes. They're fun and they make you sweat like mad. Seriously. Check the one out tonight. 75 high knee jump ropes followed by 25 squats. Repeat 9 more times. Puke. This woman did all 10 sets in 18 minutes! It took me 35 minutes and now I can barely walk up the stairs. Seriously. That's half the reason I'm writing this post. I can't get out of the computer chair. And Zuzana did this with a freakin 8kg sandbag on her back for the squats. You have to respect that. And her form sickens me. I look like a gyrating ectomorphic mass most of the time. But that is why she looks like this (yes, they're fake),

and I look like this (mine're all real).

But some day I will be a certified Bodyrocker too! Wait and see!

Current weight: 185lbs
Current BMI: 28.1

Goal weight: 164 lbs
Goal BMI: 24.9

PS-For all you BMI naysayers, a MASSIVE study published in the New England Journal of Medicine recently looked at mortality in 1.5 million white adults over a period of 10 years. It found that the healthiest weight was one with a BMI of 20-24.9. Death rates in the group 20-22.4 were similar to those in the 22.5-24.9 group. They used to think lower was better but now it appears a 22.5-24.9 BMI is just as healthy, which is good news for us who struggle with weight as it is much more attainable and sustainable. Even being a bit overweight (25-29.9) increased risk of mortality by 1.13X. Those with BMIs 40-49.9 had the highest mortality rates, increasing their risk over normal weight individuals by 2.51. To give you an example of how big that is, I'd have to weigh 265 lbs on a 5'8" frame.

Dinosmarts

noreply@blogger.com (Pharmadaddy) — Mon, 15 Nov 2010 04:48:00 +0000

My wife spent the weekend in Edmonton having a little time with her sisters before baby #3 comes along. She brought home a sticker book for Sacha filled with dinosaur stickers and tons of facts about dinosaurs. It states a fact about a dinosaur and then has an outline of the sticker you need to place there. While going through the book with him, he made so many astute observations I just had to share them. Keep in mind this boy is only 4 years old.

1. Book-"Dinosaur X was a speedy carnivore and hunted its prey at night."
Sacha-"Oh, cool. That means he is nocturnal."

2. Book-Showed various dinosaurs and where they were first discovered. They showed one dinosaur that was discovered in Argentina.
Sacha-"Oh, yeah, just like the Argentinosaurus."

3. Book-Shows a picture of a velociraptor a la Jurassic Park, that is, hard scaly features, not feathers. Paleontological evidence proves that velociraptors had feathers because arm bones have been found of them with quill knobs in the bone. Sacha has learned about velociraptor feathers on his favorite show, which is also highly educational, Dinosaur Train, on PBS.
Sacha-"Hey, that picture is wrong. That velociraptor has got no feathers."

4. Book-Shows a veritable cornucopia of pterosaurs.
Sacha-Pointing to one of the smallest picture on a page of probably 30 different pterosaurs says, "Hey, there's a peteinosaurus." And he was right.

5. Book-Shows a picture of an archaeopteryx.
Me-"Do you remember what 'archaeopteryx' means?"
Sacha-Somewhat incredulous that I had the nerve to ask. "Uh yeah, it means 'old wing'."

6. Book-Shows a picture of a pterosaur flying low to the ground and says "Pterosaurs had to be careful not to be eaten by spinosaurus."
Sacha-"Daddy, but spinosaurus eats fish."
Daddy-"Well, maybe they ate birds too."
Sacha-"No. Pterosaurs aren't birds. They aren't dinosaurs either. They're just pterosaurs."
And he's right. They were flying reptiles, not birds, not dinosaurs. Silly daddy.

The kids knows more about dinosaurs than me.