Free Educational Stock Trading Videos

I recently found out about a company (INO) that offers free stock trading videos online.  While I’m not into active trading anymore (at one time I had a big interest in it), there are plenty of investors out there who love to trade stocks.

INO offers free online videos which are basically educational trading strategy lessons for someone who wants to trade stocks.  This particular link leads to four different videos by trading experts who give up some of their secrets.

First you go to an intro page where you must register to watch the videos – this involves a basic registration – no banking info or credit info is required.

The four videos available:

Market Wizard InsightsJack Schwager explains the traits and behaviour patterns that supertraders have in common.

Applying Technical – 90 minute video – verteran market analyst John Murphy explains how he looks at the markets.

Five New Tools for WinnersJake Bernstein is probably the most prolific writer and researcher of material for today’s individual trader.

The Art of Morphing – Every position is the right position when things go exactly as planned.  If not??


Mutual Funds

A while back I was at a dinner with a bunch of people. A fetching young lady and I started talking finances (Mr. Cheap knnoowwwsssss what the ladies like…) and I referred to ETFs as “the thinking man’s mutual fund”. My father, who has been an avid mutual fund investor for decades gave me a bit of a hurt look, and I felt bad (I didn’t think he was listening to me).

I got talking to a buddy who, on the advice of HIS father, was hot-to-trot to invest in a Spectrum mutual fund. I told him to get a diversified group of ETFs instead – pointing him towards Canadian Capitalist’s “Tour of ETFs” and “Sleepy Portfolio” (as well as Money Sense’s couch potato portfolio). When I told him that a diversified ETF portfolio should average a 10% nominal return over the long haul (this is retirement money he’s looking to put away), he asked why he’d settle for 10%, when the Spectrum fund had averaged 36% over the last three years.

One of the best things about teaching someone something is that your fundamental assumptions are occasionally questioned. It can be a great way to expand your understanding in a direction that you didn’t even realize you were deficient in if you’re unable to answer their question (in which case you should probably go educate yourself until you can answer their question).

My response to him started with the idea that past returns don’t guarantee future returns. I talked a bit about mean reversion (the idea that often an area that has been recently hot may go into a slump in the near future, or an area that has been in a slump may take off). He agreed with this in theory, but then asked “isn’t the manager a smart guy who knows how to move in and out of areas to make lots of money, leading to an ongoing above-average market returns?”.

I agreed that this was usually the story mutual fund companies liked to sell, but I talked about how research had shown that mutual funds UNDERPERFORM the market on average. Since people aren’t just randomly chosen to run mutual funds (these are all professional investors), it makes the whole system pretty suspect if the average PROFESSIONAL can’t beat the market.

I followed this up with the problem of popular (high performing) funds attracting lots of money, and how its harder to get high returns once a fund gets too big. The basic idea is that if they find a good deal, they can’t buy as much of it (as a proportion of their portfolio) as a small fund could. It may be worthwhile for an individual to shop at garage sales for bargains, but it doesn’t make sense for Walmart to do this (they wouldn’t be able to find enough bargains to stock their shelves).

Following closely on the idea of big funds having trouble outperforming the market, I talked about how mutual fund companies start a large number of “incubator” funds. They let the managers of these small funds take whatever crazy risks they want. The hope is that some of their funds will wildly outperform the market (and, of course, if you have enough funds doing different things some will), they then promote that fund as their “flagship” product, promote its amazing returns in all the financial papers / magazines, roll over the poorly performing funds into it (and get tons of new investors in it). Since they know at this point they probably won’t keep getting lucky again, they then track the market as much as possible (so they don’t lose tons of money and annoy all the new investors), and prepare the next batch of mutual funds to create the “hot fund” of the future.

For some strange reason, these monsters funds tend to give you a return of [market – expenses]. Isn’t that curious :-).

At this point, ETFs offering [market – small expenses] look appeals, and that’s what I recommended buying. My friend still seemed somewhat hesitant, and I encouraged him to talk to his father further. I offered to buy him a copy of “Four Pillars of Investing” but he immediately told me under no circumstances would he read it. I felt kind of bad that I hadn’t been able to convince him of the value of ETFs, but the next time I saw him I asked him if he’d bought the Spectrum fund and he told me “No, I’m looking into ETFs”.

For those who used to invest in mutual funds and stopped, what convinced you to bail on them? If you’re a fellow ETF / Index Fund evangelist, what do you like to say to people to convince them to consider ETFs? If you’re a mutual fund fan, which parts of this post do you think I’m mistaken about (remember that “you’ve got it ALL wrong, mister!” is often a fair response to Mr. Cheap’s rants).

Personal Finance

Safe Withdrawal Rule for Retirement Funds

Yesterday I posted part one of this topic Why Retirees Should Have Equities In Their Portfolio.

One of the biggest concerns for retirees is the fear of running out of money. If you are retired and living off a pension which is indexed for inflation then you don’t have much to worry about since the pension should keep going until you expire. What happens if you have no pension or only a little bit of pension income from a source like a government pension plan? Then you need to live off income from your investments.

How much can I safely withdraw from my retirement funds?

Simple – use the 4% rule. This will give you a great chance of not running out of your money and it’s valid for 25+ year periods. If you are at an advanced life stage where 25 years is a dream then the 4% can be adjusted upwards.

The way the 4% rule works is that you start by taking 4% out of your portfolio in the first year – this includes dividends, interest, withdrawals. The next year you take out the same figure you took out the first year plus inflation. So if you start by taking $40,000 out and then inflation is 3% then the second year you take out $40,000 + 3% ($1200) = $41,200. Every year after that you adjust the previous year’s withdrawal amount by the inflation rate.

Keep in mind that this amount only covers the withdrawals from your investments. Any other income you have, such as pensions, will be in addition to the withdrawals. If you find the 4% rule doesn’t give you enough income then you can either cut back your spending or increase the withdrawal amount (which will increase the chance you will run out of money later on).

The 4% rule is really a guideline rather than a hard and fast rule – If your equities perform better than expected then you can spend a bit more than the 4% rule amount however the opposite is also true, if you encounter a bear market and the value of your portfolio drops then you should be prepared to cut back on the withdrawals.



Why Retirees Need Equity In Their Portfolios

One of the standard pieces of advice for retirees is that they have to have a very conservative portfolio since they are too old to take any chances with equities. There are “rules” around what percentage of fixed income (ie bonds) a retiree should have. “90 minus your age” is one that I’ve heard a lot.

These rules were probably pretty good guidance at a time when your average retiree finished work at 65 and could reasonably be expected to live for another ten years or so. With a short term investment horizon it didn’t make sense to invest a lot of money in equities because the retiree wouldn’t live long enough to recover from any major losses. Inflation was also not a major concern since the time line was fairly short.

Fast forward to now and there are two major differences in retirees – first of all they are retiring earlier which lengthens the retirement time and they are living longer which of course also increases the retirement time which in turn means that they have a longer investment time horizon so a higher allocation of equities is appropriate. Typically most financial planners will assume an estimate lifetime of around 90, so if an investor retired at aged 60 and lived until age 90 – that’s a 30 year time horizon.

You might be asking – who cares how long the retirement lasts for? Shouldn’t you just be conservative and buy guaranteed fixed income products or annuities and live off the payments? One problem is that while retirees might be living longer once retired, they aren’t working longer, in fact they might even have slightly shorter careers on average so current retirees might not have any more money saved (adjusted for inflation) than someone who retired a generation or two ago and they are less likely to have any kind of company pension plan to help fund the retirement.

The reality is that historically equities have outperformed bonds by a long shot. According to William Bernstein – author of “The Four Pillars of Investing”, two reasons to invest in equities are for the higher expected return and because equities can keep up to rising inflation. If you are retired and your portfolio is entirely fixed income (or annuity) you might run into the problem of a steadily lower standard of living if inflation increases.

Other reasons to invest in equities are that interest is taxed at a higher rate than dividends and capital gains (in Canada and USA) so you will probably be better off if you can only pay dividend and capital gains taxes rather than income tax on interest payments.

What to do?

The answer is two fold. First of all, retirees should have a significant equity holding in their portfolio. Bernstein recommends anywhere between 50% to 75% equities depending on your tolerance for risk. One of the key points that Bernstein emphasizes is that whatever asset allocation you choose, you have to stick with it so pick an allocation that you can handle in rough times. If you choose a higher percentage of equities and then sell when the equities drop and then buy back in when they go up, then you will be further behind compared to if you had just picked a more conservative portfolio and stuck with it. Even if you choose to have an equity allocation of less than 50% then stick with that allocation.

Tomorrow we’re going to discuss the 4% withdrawal rule which will help determine when you can retire.