Tag: passive investing

Categories
Personal Finance

John Bogle: “The stock market is a giant distraction.”

This guest post is written by Mike from the The Oblivious Investor.   This blog has been around for a few months and is very investment oriented (but not too techy) so I would recommend you check it out (I’m a regular reader).

For me, the above quote was enough to make Bogle’s Little Book of Common Sense Investing worth the read.

In just 7 words, Bogle manages to:

•    Provide an insightful piece of investing wisdom.
•    Make you question your assumptions.
•    Offend an entire industry.

So what is Bogle saying here? I think he’s making two distinct points. First, he’s making a statement about intelligent investing. Second, he’s offering a rather pointed criticism of the financial services industry.

Passive investing is a good thing

As to investment strategy, Bogle (as usual) is suggesting a system of passive investing. We can’t predict whether the market is about to go up or about to go down, and attempting to do so will only harm our performance. Similarly, attempting to pick individual stocks is unlikely to prove successful.

So if we stand to gain nothing by timing the market or picking stocks, what’s the point in watching the market? There is no point. All it can do it tempt us toward poor decisions. Better to ignore it.

Financial service is expensive

Bogle’s second point is one about the financial services industry in general, and it’s a bit less obvious. At their most fundamental level, financial markets exist to connect providers of capital (investors) with users of capital (businesses). Without a doubt, this is a valuable service.

However, in recent decades, the financial services industry has convinced us that it performs another service as well: Enhancement of investment returns. This is, however, impossible by definition.

There’s no way that investors—as a group—can earn more than the total earnings of the businesses in which they invest. The total return earned by investors must be equal to the return earned by the businesses in our economy, minus the costs of investing.

We can therefore conclude that, rather than enhancing investor returns, the financial services industry must in fact be reducing investor returns by the sum total of all the fees that they charge us. Sadly, these costs of investing—mutual fund sales loads, fund operating expenses, brokerage fees, etc.—now total in the hundreds of billions of dollars per year.

Conclusion – ignore the market

I think Bogle’s reference to the stock market as a “giant distraction” is his way of telling the reader precisely how much value he sees in the services offered by most firms in the industry.

Takeaway lessons for us:
1.    Turn off BNN and CNBC, and
2.    Do your best to minimize the investment costs you pay.

About the Author: Mike writes at The Oblivious Investor, where he regularly reminds readers to ignore the noise of the market. If you like this post, subscribe to his blog to read more.

Categories
Investing

The Death Of Index Investing And Other Silly Stats

I recently came across yet another post on investing which goes something along the lines of “If you invested 10 years ago in the Dow then you would have earned exactly nothing in that time”.  I hate to pick on any one blogger since I’ve read these articles all across the blogosphere but this one is the latest and he also had the temerity to tie in poor index performance with the death of index investing.  Of course all the stock pickers out there ALWAYS beat the index so poor market are no concern to them…!  I want to emphasise that Jacob at Extreme Early Retirement does a great job with his blog and I don’t want to sound like I don’t like the blog – just that one post!  🙂

What about the dividends?

Usually these posts look at the point value of an index at a previous time, say 10 years ago and compare it to the present index point value.  This is incorrect because they are missing dividends.  Published index returns always included reinvested dividends and any type of analysis on index performance should always include the same.  Admittedly, if you are looking at a 10 year period where the index point value hasn’t changed, the addition of dividends isn’t going to change the argument very much but it should be there.

Selectivity of stats

Why is it that all the articles always pick the worst peak to trough period to illustrate their rather suspect point that maybe equity investing or even index investing is evil?  Have you ever heard of such a person who invests all their money on the same day the markets peak and then doesn’t invest any more?  Doesn’t seem all that likely to me.  Most people invest their money over time because that’s how they earn it, then save it, then invest it.  Picking one particular time period to prove or disprove a theory is like measuring your gas mileage one mile at a time and then using the best or worst mile to prove your point.

Investment performance

And what about active stock pickers – did they all do better than the indexers over that period?  Or did some of them do better, some of them the same, and some of them didn’t do as well?  I’ve asked many bloggers and non-bloggers who claim they can beat the index by picking their own stocks to prove it – measure their performance and let me know if they did better than the market or not.  You know what?  Not one of them has ever shown that they can beat the market – oddly enough, most of them don’t even bother to measure their performance.  How can someone who doesn’t even know how their own investment method measures up criticize someone else’s?

What is average?

One of the criticisms of indexing is that you will only achieve “average” results – again – will I do better by randomly picking stocks or paying someone lots of money to pick them for me?  One thing about indexing is that you will get the index return minus a very small fee – you will never beat the index but more importantly you won’t underperform the index (except for the small fee) either.  Active pickers can certainly outperform the market but they can also underperform as well – sometimes by a huge margin.  I like making money – if I thought it was possible for me to beat the market then you can rest assured that I would give it my best effort.

Dividends, smividends

Ok – one more rant… I like getting dividends just as much as the next investor but I really think there is an over-weighting on the importance of dividends in the blogosphere.  Yes, the idea of living off your dividends is nice but investment performance measures total return which is capital gains plus any reinvested dividends and interest payments.  That’s it.  I don’t care in what form the company pays out in the end – if the total return is higher, then its a better investment.  If that includes dividends, fine – if not, that’s fine too.

Categories
Investing

Indexing My RRSP

I recently moved my rrsp account from low cost mutual funds to Questrade where I bought some ETFs. I thought I would share the experience with you since I learned a few things during the process.

My plan was to buy four ETFs:

  1. XSB – ishares short term bond (Cdn $)
  2. XRB – iShares real return bond (Cdn $)
  3. VTI – Vanguard US equity (US$)
  4. VEA – Vanguard Europe and Far East (US$ to buy)

I described in a previous post about my first efforts at completing an equity trade. With this solid background I figured I’d be in better shape this time.

If you check out my post on my planned asset allocation you’ll notice that this portfolio is incomplete. That’s because we have several investment accounts so this one doesn’t represent the entire asset allocations. Once I get all the accounts figured out then I’ll post on the final asset allocations.

My goals for this exercise was to try to buy as many shares as possible and minimize the amount of cash in the account and to try to get it over with quickly. I didn’t want to have to spend a lot of time at work trying to get the best price for each security.

I started off with the Canadian purchases. This turned out to be a minor mistake because for some reason I thought that once I purchased the Canadian securities I would phone Questrade and get the Cdn$ converted to US$ and then buy the US$ securities. In actual fact when you buy US$ securities, you put the order in and then the dealer converts to US$ when the trade gets filled. The problem is that since you don’t know the exact currency conversion rate in advance you can’t utilize your last few dollars properly when buying a US$ security since you don’t know the exact maximum number of shares you can buy.

I used only limit orders which are market orders with a limit on them ie if you put in a buy when a stock is trading for around $50.00 with a limit of $50.50 then you will get the market price but only if it is less than or equal to $50.50.

Anyways, on with the trades…

XRB – The ETF had gone from $18.49 to $18.50. I put in a limit order for 700 shares with a limit of $18.55. It was filled immediately for $18.49. Very successful trade!

XSB – This one caused me a some trouble. This one has very slow trading activity so unless your order gets filled right away it might take a while. The last order was $27.97, I put an order for 1050 shares with a limit of $27.98 – first mistake – I should have had a higher limit. Second mistake, I didn’t put in a “all or none” order and 50 shares got filled at $27.98. The price drifted up during the day so my 1000 shares remaining with a limit of $27.98 couldn’t get filled. The problem was that I was already looking at one commission for the 50 shares so if I cancelled the remaining order the I have to pay a second commission. Luckily the trades are cheap at Questrade because by the end of the day the order had expired. The next day the last trade was $28.03, I put in my order of 1000 shares with a limit of $28.05 – filled right away.

VTI – this ETF had the higher share price so I bought it next. Last trade was $146.17 so I put in order for 350 shares with limit of $146.20. The price went up quickly to $146.20 so I had to wait about 15 minutes and it was filled at $146.20.

VEA – my problem with this order was that I didn’t know how much money I had in US$ – I called Questrade to get a recent conversion rate which I used to approximate the amount – I decided to go for 1000 shares. Last trade was $47.29, I put in order for 1000 shares with limit of $47.32 with all-or-none to prevent partial filling. Price went up for a while but it got filled about half an hour later at $47.32.

The next day I checked my cash balance and I ended up with about $900 in cash. This isn’t a big deal since these ETFs will be creating cash via interest and dividends anyways but if I could do it again, I would have left one of the Canadian securities to be the last trade so that I could accurately use up all my cash.

Anyways, it was fun buying these ETFs and I ended up learning quite a bit in the process.

Categories
Investing

My Portfolio – An Asset Allocation Decision

Last fall I sat down for the first time ever (after 13 years of owning mutual funds) and looked at all our investments and did an analysis to determine what our asset allocation was. As I recall we had over 90% equity and a good portion of that equity was in Canada. At that time I decided to make the equity/bond split to be 80%/20%. This was chosen somewhat arbitrarily although it seemed to be a good mix for a fairly aggressive portfolio with a long investment time horizon. I also changed the country mix in order to reduce the Canadian holdings down to about 30% of the equity portion.

At this point in time I will be revamping my portfolio once again since I decided to move about two thirds of our rrsp to a broker (Questrade) in order to convert it to ETFs. The remainder will stay in low cost mutual funds and GICs. I’ll be discussing some of the specific investments in future posts but I plan to start with the asset allocation since that’s the most important decision in my opinion.

The first asset allocation decision was to lower the equity portion of the portfolio down to 75% from 80% and to raise the bond portion up to 25%. I decided to do this mainly based on the research of William Bernstein (Four Pillars of Investing) which showed that having an equity portion of a portfolio higher than 25% wasn’t worth the extra risk since it usually didn’t result in a significantly higher return and of course results in more ups and downs with the market.

Interestingly enough Bernstein says that although 75% equity should be the maximum for an investment portfolio, 50% should be the minimum regardless of your age. The reason for this is that if you are retired and have a more conservative portfolio ( less than 50% equity ) then inflation is a bigger risk. Another great point he makes about asset allocation is that you should have a more conservative portfolio if you’re not sure if you can handle the volatility in a downturn. If you sell equities every time the market drops and then wait until it goes up before buying in again, then you are better off in a more conservative portfolio (ie 50/50) if that allows you to stay invested during the downturns.