Tag: return

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Announcements

Are You Changing Your Asset Allocation? Contest for $$!

Glenn Cooke, President of InsureCan, is sponsoring a contest on this blog (and a few others listed below) where you can win one of two $50 Chapters gift cards. Here’s how to enter the contest:

In the comments – please answer the following question

“Have you changed (or are you going to change) your asset allocation as a result of the awful equity returns in the past year?   Please indicate any change ie “used to be 100% equities – now I’m zero percent equities”.

Answering this question will give you 1 chance at a gift certificate.  Subscribing to the blog if you don’t already do so, might also help your odds (but not likely) 🙂

Contest will be closed at 8 pm on Thursday, January 22.

Contest is open to Canadian residents only.

Check out similar contests at the Canadian Capitalist and the Financial Blogger.

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

Comparing Market Cap ETF vs Dividend ETF – How Much Duplication?

I had a reader question the other day where they mentioned buying both XIU (iShares Cdn Large Cap 60 ETF) and XDV (iShares Cdn Dividend Index Fund ETF) for their portfolio.  I had responded that although I wasn’t sure, I suspected that might be a lot of duplication in the two funds since XIU has all the biggest public Canadian companies – a lot of which are good dividend stocks and would probably also be in XDV.

Duplicate holdings is a common problem in mutual funds – especially in a market like Canada where there are not a lot of different companies to buy for the larger funds.

I decided to do a bit research and find out if there was as much duplication as I suspected in the two funds.  The question I want to answer is if it is worthwhile to own both funds for diversification purposes or will just one do.

Number of companies in common

The first and simplest criteria was how many companies are in both ETFs.  This isn’t necessarily all that meaningful since one ETF might have a lot of XYZ company whereas the other might only have a small holding.

XIU 60 has 61 holdings (can’t they count?), XDV dividend has 31 holdings, there are 15 companies that they have in common.  This seems like quite a bit since it means that half of the companies in the dividend ETF are also in the XIU ETF.

Amount of market cap in common

What I did here is take the companies that are in both ETFs and compare the percentage holdings and add up the smaller number.  For example if CIBC was 9% of the dividend fund and 5% of the XIU then I counted that as 5% in common (by market cap).   This totalled up to 31%.  This was a smaller number than I expected which means that a good portion of the dividend ETF is not represented in the XIU 60.

Measuring correlation between the ETFs

The next test I did, which should have been the first and only test since it is the only one that has any real meaning is to measure the amount of correlation between the two ETFs.   Correlation is a measure of the relationship between the prices of the two ETFs.

A measure of 1 means that they always move in price exactly the same way, a measure of 0 means they are completely uncorrelated and a measure of -1 means they always move in price in exactly the opposite direction.  One of the main concepts behind building a portfolio is to try to find different assets that are not correlated with each other.

To accomplish this I needed some historical price data which I managed to find at Yahoo Finance.  To figure out the correlation I used the Excel correl function (is there anything Excel can’t do?).  XDV dividend has only been around since the end of 2005 so the data is only for a bit less than 4 years.  Not being a stats guy I’m not sure if this is a long enough period to be meaningful but it’s all I’ve got.  Regardless, the correlation “r” number was 0.72 which implies some benefit for diversification but not a whole lot.

Performance

The last thing I looked at was performance.  Since the time period is fairly short I’m not looking to see which ETF did better but rather to look at the difference in performance.  Ishares.ca website has a handy calculator just for this purpose.  I choose the last 3 years since the next category was 5 years which wouldn’t work for XDV dividend.

3 year total return

  • XIU Large Cap 60 = -12.98%
  • XDV Dividend = -18.19%

From what I’ve read the XDV dividend has a higher ratio of financials than the XIU 60 which is probably one of the reasons for the big performance difference.  The XDV dividend has a higher mer (0.5%) than XIU 60 (0.17%) which would account for about 1% of the 5% difference.

Conclusion

I looked at 4 categories to see how different XIU and XDV are:

  • Similar companies – half of the XDV dividend companies are in XIU.
  • Similar companies by stock market capitalization – 31% of the companies market cap are in both ETFs.
  • Correlation – over the last 4 years the correlation is 0.72.
  • Performance – the two ETFs were about 5% off in terms of total performance over 3 years.

What does it all mean?   Hard to say – there are much better ways to diversify your portfolio – REITs, small cap, foreign holdings would likely all have correlations that are less than 0.72.  I’m also not crazy about the higher mer of the dividend ETF.

I think if you want to have most of your equity in Canada then buying partially overlapping ETFs might be the only way to diversify without getting into individual stocks.  Personally I like to be diversified over the whole world so for me, the XIU Large Cap 60 by itself is good enough – in my case adding XDV would not increase my diversification enough to make the higher mer worthwhile.  XIC (TSX 300) is also a good choice.

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

Will A Big Canadian Bank Fail?

I have to admit that while I haven’t been bothered by the falling markets, today I found it a bit tough for some reason.  It seems like every day the market falls and if it’s only 1 or 2% then that is ok.  Well today the Canadian market fell 9%.  9%!!! That would be a bad year by itself and it was only one crappy trading day of many crappy trading days.  The worst part was the banks – they have been pummelled this year and today the big 5 went down by an average of almost 13%.  13%!!! Very depressing I thinks.

Now, I haven’t gone all anti-Bernstein or anything – I have no plans to sell any equities under any circumstance.  What my concern is now is will one of the big Canadian banks fail? Here are some things I’m worried about:

Canadian banks own bad US mortgages as well

Our banking system was recently named as the best in the world.  Our lending standards were much stricter than the US banks so everything should be ok?  The only problem is that from what I understand, the US banks got in trouble buying investments containing bad mortgages – it wasn’t necessarily all just from writing bad mortgages themselves.

The problem is that the Canadian banks also bought these same investments and have been slowly taking related writedowns all the while not talking about what their real exposure is.  These investments were enough to bring down some big US banks so why can’t they bring down a Canadian bank?  Yes, the Canadian banks have good business models so did Washington Mutual and Wachovia.  They had customers, lots of assets – a normal bank in other words – but they lost it all on the investment side.

A bad dividend trend

The thing that concerns me is that the US banks I mentioned all paid a dividend at one time.  When the stock went down the dividend yield went up…and up and up and up.  First there was a dividend cut and then the bank went out of business.

The dividend yields for the Canadian banks in order are:

  • BMO 8.4%
  • CIBC 7.3%
  • BNS 5.9%
  • Royal 5.6%
  • TD 5.4%

The ones that really stand out for me are BMO and CIBC – 7 or 8% dividends that don’t pay return of capital are too high.  Either they are mispriced or investors are expecting a dividend cut.  Now we haven’t seen the double digit dividend yields enjoyed by the US banks before they went belly up but the yield on BMO and CIBC has roughly doubled over the last year or so.

Summary

I really hope that none of the banks go under but I am concerned about it.  Can anyone please tell me that I’m wrong??

Categories
Money

When Will You Get Your Early Economic Stimulus Rebate Check?

“When will I get my economic stimulus rebate check?” is one of the big questions that Americans are asking themselves at the moment. Actually I’ve been asking that question as well but I’m not holding my breath for it!

The economic stimulus checks started on April 28 and will continue through to mid-July of 2008.

The schedule for people who filed their taxes by April 15 is based on the last 2 digits of their SSN – Social Security number. If you filed jointly then the payments will go out based on the person listed first on the return.

IF YOU USE DIRECT DEPOSIT

Last two SSN digits: Payments will be transmitted no later than:
00 through 20 May 2
21 through 75 May 9
76 through 99 May 16

IF YOU WILL GET REBATE BY MAIL

Last two SSN digits: Payments will be mailed no later than:
00 through 09 May 16
10 through 18 May 23
19 through 25 May 30
26 through 38 June 6
39 through 51 June 13
52 through 63 June 20
64 through 75 June 27
76 through 87 July 4
88 through 99 July 11

If you couldn’t get your act together to file your taxes by April 15 (but you did file since then right?) then you will get your rebate about 2 weeks after the scheduled date. You need to file your taxes by October 15 in order to get a rebate this year.

Here is the IRS online calculator to figure out how much your rebate will be.

If you are confused about whether this rebate is actually a loan then this post should clear things up.

Categories
Investing

Do You Really “Earn” Your Investment Income?

I met an acquaintance a while back who told me that he was day trading while in between jobs. I was quite curious about his strategies and how much he was making but he wouldn’t give me many details and I didn’t know him well enough to push. He did tell me on several different occasions though that he “was making good money” with the day trading.

The reason I wanted to know what kind of returns he was getting was because I was skeptical that he was doing as well as he said he was, and also because I wanted to point out to him that in a year when the market goes up around 18% as it did that year, it’s not hard to “make good money” by doing pretty much any kind of investing.

Stock markets go up and down over time. The main reason people invest in them is because they believe that over time, the stock market goes up more than it goes down, which has held true since the beginning of time (or stock markets). The reality is that nobody can accurately predict what the market is going to do any given year. It might go up 10%, it might stay flat or there could be a big loss. The phrase “A rising tide floats all boats” applies very well to equities. In years when the market gives double digit returns, everyone looks like a great investor. In years when the markets drop, almost everyone is a loser.

My point is that someone who is invested in equities in a market that goes up 10% and gets 10% on their investments didn’t really “earn” anything because of their investing prowess since they only got the market return which is easily obtainable with a basic ETF or index fund.

I think that all active investors should measure how much value they are adding by choosing their own stocks or mutual funds by comparing their returns to some kind of index or passive alternative based on an index such as an index fund or exchange traded fund. This would apply regardless of if you are trading stocks hourly or buying stocks for the long run (hello Siegel!).

For example if you trade your own stocks or bought active mutual fund and got a 10% return in a year, that sounds pretty good but is it? Did you really “earn” 10% by picking your own investments? What if the index returned 8% that year. Then I would say that your stock picking really only earned 2%, not 10%. Conversely, what if the index returned 12% that year. I would then say that your active management cost you 2% of your potential portfolio that year.

To accomplish this comparison if you trade stocks and/or buy mutual funds is to find an ETF that covers similar stocks. If you are an investor who likes to buy large American companies then you might want to look at an ETF like Vanguard Large-Cap ETF (VV) or even just look at the entire American stock market with Vanguard Total Stock Market Index VTI (the “American” is silent). ETFs and index funds charge a small fee so they will never match the index but should be pretty close.

Another thing to think about is the absolute amount of dollars you are earning from your investments.  If you spend a lot of time trading stocks or planning investments and you are really only earning say a 2% premium return on your investments per year then how does that work out per hour?  If you are investing $10 million dollars then 2% is $200k which is well worth the effort.  But if you only have a couple of hundred thousand then 2% is only $4k which is not a lot of money if you spend a lot of time on your investments.