There are many mistakes we can make when investing in mutual funds or exchange-traded funds.  Joe Wiggins discusses these mistakes from a unique perspective in his book The Intelligent Fund Investor .  He covers some familiar territory, but in a way that is different from what I’ve seen before.  Although most of the examples in the book are from the UK, the points of discussion are relevant to investors from anywhere. Each of the first nine chapters cover one topic area where fund investors often make poor choices.  Here I will discuss some of the points that stood out to me. “Don’t invest in star fund managers.”  There are many reasons to avoid star fund managers, but I never thought of lack of oversight by the fund company being one of them.  “Individuals working in risk and compliance have little hope of exerting any control – they are likely to be relatively junior and considered expendable.  If they go into battle against a star fund manager, ther...

Occasionally, a friend or family member asks for help with their investments.  Whether or not I can help depends on many factors, and this article is my attempt to gather my thoughts for the common case where the person asking is dissatisfied with their bank or other seller of expensive mutual funds or segregated funds.  I’ve written this as though I’m speaking directly to someone who wants help, and I’ve added some details to an otherwise general discussion for concreteness. Assessing the situation I’ve taken a look at your portfolio.  You’ve got $600,000 invested, 60% in stocks, and 40% in bonds.  You pay $12,000 per year ($1000/month) in fees that were technically disclosed to you in some deliberately confusing documents, but you didn’t know that before I told you.  These fees are roughly half for the poor financial advice you’re getting, and half for running the poor mutual funds you own. It’s pretty easy for a financial advisor to put your savings into some...

I get a lot of questions from family and friends about investing.  In most cases, these people see the investment world as dark and scary; no matter what advice they get, they’re likely to ask “Is it safe?”  They are looking for an easy and safe way to invest their money.  These people are often easy targets for high-cost, zero-advice financial companies with their own sales force (called advisors), such as the big banks and certain large companies with offices in many strip malls.  An advisor just has to tell these potential clients that everything will be alright and they’ll be relieved to hand their money over. A subset of inexperienced investors could properly handle investing in an all-in-one Exchange-Traded Fund (ETF) if they learned a few basic things.  This article is my attempt to put these things together in one place. Index Investing Most people have heard of one or more of the Dow, S&P 500, or the TSX.  These are called indexes.  They a...

Reader ML asks the following good question (edited for length): I am relatively new to investing for dividends. Currently my strategy is to invest in high quality stocks and hold them for a long time. You are one of the bloggers who switched from buying individual stocks to buying ETFs. I get the strategy of ETFs in that it’s hard to beat the market with individual stocks. My question: Over years the dividend you receive from an individual stock continues to grow. If ETFs switch over their portfolio would they not miss out on this increase in dividends, year over year? It seems to me that the dividends stay pretty steady in the ETFs. Is that not a big chunk of money to miss out on? The short answer is that ETF dividends do grow. The dividends that low-cost index ETFs pay are mainly the dividends collected from all the individual stocks held within the ETF. There is a small deduction for the costs of operating the ETF and possibly a small increase from securities lending,...

The debate about whether you are better off to seek financial advice from paid advisors or to do it yourself (DIY) rages on. Both sides make good points, but they don’t exactly address the same issues. Advocates of financial advice point out that most people just don’t have the knowledge to properly invest their own money. Even those with the right knowledge tend to make emotional mistakes that lead to portfolio destroying buy-high and sell-low behaviour. This is all true. However, the majority of investors who seek out a financial advisor will not get the good advice they need. There are great financial advisors out there, but there are more mutual fund salespeople who have little investing knowledge beyond understanding that they need more assets under management to earn enough income to pay their bills. DIY advocates say that a basic indexing approach is simple and easy to implement and will outperform the majority of investors. This is true. I do this myself and find it...

A while back Canadian Capitalist described a “foolproof method to convert Canadian dollars to U.S. dollars” using a version of the so-called Norbert Gambit. This involves buying the exchange-traded fund DLR with Canadian dollars, journaling it over to the U.S. dollar side of your account to make it DLR.U, and selling it to get U.S. dollars. I decided to try this at BMO Investorline. Overall it worked, but there were a few surprises along the way. Note that each unit of DLR just holds US$10. This is true whether it is DLR or DLR.U. The difference is that DLR trades in Canadian dollars and fluctuates with the exchange rate, and DLR.U trades in U.S. dollars. I don’t normally like to talk numbers about my personal accounts, so for the rest of this article, I’ll scale all the numbers down as though I was converting C$100,000 to U.S. dollars. The bid-ask spread on DLR was C$9.79 to C$9.81. I placed an order to buy 10,100 units of DLR at a limit of C$9.81. This trade was filled a...

Many commentators preach the benefits of choosing an asset allocation strategy, sticking with it, and rebalancing regularly. This is good advice, but some investors overestimate the benefits of portfolio rebalancing. If done properly it can certainly increase returns, but the gains are usually quite modest. Consider the following example. Emily starts with a balanced portfolio worth $22,000, half in a stock ETF and half in a bond ETF. Initially, both ETFs trade for $50. Emily’s starting portfolio looks like this: Stocks: 220 shares @ $50 Bonds: 220 shares @ $50 Now, suppose the stock ETF goes up 10% and then comes back down again. If Emily does nothing, her final portfolio value will be $22,000, the same as it was at the start. But, if she rebalances, she will make some money. Let’s see how much she can make (ignoring commissions and spreads for now). After the stock ETF has gone up 10%, Emily’s portfolio looks like this: Stocks: 220 shares @ $55 Bonds: 220 shares @...

Part of the theory behind maintaining a fixed percentage allocation of your portfolio to different asset classes, like stocks and bonds, is that when markets are volatile, you can increase returns by rebalancing.  Unfortunately, there is no immediate return from rebalancing. To show that rebalancing has created a profit, you need to take into account not just your most recent rebalancing trade, but also the last time you rebalanced in the other direction.  If you do the calculation, it will show whether the second to last rebalancing trade produced a profit, but the most recent one won't show a profit until the next time you rebalance in the other direction. This situation creates a problem of a delay from effort to reward.  We're much better at doing things that give immediate gratification.

Gary Kaminsky was a successful money manager and is now co-host of the CNBC show Strategy Session . His new book Smarter than the Street lays out an ambitious goal of teaching readers to do what he did: “We did it constructing a specific strategy and adhering to that strategy, regardless of the investing climate. It is a strategy that almost anyone can learn. One of the primary goals of this book is to reveal this strategy, step by step, to individual investors.” Kaminsky makes big promises in the Introduction that go largely unfulfilled in the rest of the book. The “specific strategy” turns out to be quite vague and relies heavily on gut feel. A large block of the book is devoted to advising investors to read company annual reports, look for big changes, and pay attention to how companies use excess cash. How to use this information to pick stocks is left unstated except for some examples. Some parts of the book are more specific, such as the recommendation to own betwee...

Readers of investing blogs tend to be those who enjoy spending time thinking and talking about investing. However, most people would rather talk about foot fungus than investing. These people see investing as a necessary evil and want to handle it in the easiest possible way. It seems like a no-brainer that the easiest way to invest is to hand your money over to a financial advisor and just do whatever he or she says. Even if we ignore the high cost of paying the typical advisor, I’m not convinced that the answer is this obvious. The term “DIY investor” conjures up images of a group of people boring their spouses at a party with endless talk of whether Apple or Google stock will go up or down. But it doesn’t have to be this way. An investment portfolio can be just about as simple as a bank account. For example, an investor could just divide investment funds into thirds: one-third for a Canadian stock index, another for a U.S. stock index, and the last for a bond index. New ...

After a quick look through old brokerage statements, it seems that my number one cost is not commissions or spreads but currency-conversion charges. These charges are mostly hidden, but they are very real. I’m a little under the weather and haven’t actually studied the numbers carefully, but I plan to. Canadian Capitalist posted two ideas for avoiding currency conversion charges on U.S. dividends. These are good ideas, but the longer-term answer is to pressure discount brokerages to do two things: 1. Allow investors to hold U.S. dollars in RRSPs. A few do this already. 2. Start charging more reasonable currency conversion percentages. The high percentages used to make sense when banks actually had to handle cash, but for electronic transactions, banks could easily make a profit charging one-tenth of what they charge now. Feel free to give your brokerage a hard time about this.

We often hear the following two seemingly contradictory claims: 1. Most investors need financial advice. 2. Most investors should get rid of their financial advisors. How could these both be true? The answer boils down to what we mean by advice. If you imagine the advice coming from a savvy investor who has your best interests at heart, then you would do well to listen. In this case, even experienced do-it-yourself investors could benefit. Investors need good advice, not just any advice. If someone suggests that you borrow $100,000 and bet on red at the roulette table $1000 at a time until the money doubles or is gone, this qualifies as advice, but not good advice. (By the way, your chances of doubling your money this way are less than 1 in 30,000!) Unfortunately, in the mutual fund world, “advice” means whatever tactics a mutual fund salesperson uses to get your money into a set of funds. Typically, the clients pay about 1% of their assets each year for this so-calle...

Many people asking me about do-it-yourself (DIY) investing. Despite their initial interest, the usual result is for these investors to take no action and continue investing in expensive mutual funds. This has caused me to rethink how best to approach the subject. I now think that investors might be best to try easing into DIY investing rather than deciding whether to make one big jump. To illustrate how these interactions between me and a curious investor tend to go, I'll describe the case of a particular investor and acquaintance of mine who I'll call Sam. Sam said he heard that I write a Money blog and wondered if I might advise him on whether he needs to change anything about his investments. Sam had a financial advisor who he seemed to like on a personal level but didn’t make him feel comfortable about his investments. Sam couldn't understand much of what was on his multi-page account summary other than the dollar amounts that weren't going up as fast as he...