Yesterday I got a letter that had the feel of a government mailing. The envelope had a Canadian flag in the top left corner like many government letters. The contents talked about the Canada Pension Plan, shortfalls, and how I’m eligible for benefits of the Purple Shield Plan if I register now . This letter turned out to be a come-on for life insurance that covers any expenses not covered by the CPP $2500 funeral benefit. But, there is no mention of having to pay any premiums. The form of this advertising is very likely to confuse some people enough that they will send in the “information request” thinking that they might be missing out on a free government program. This kind of thing just makes me more cynical about anything I read from my mailbox.

Tom Bradley at Steadyhand invited me to comment on their comparison of Steadyhand Funds versus indexing with ETFs . The piece is clear, balanced, and worth a read. (Disclaimer: I have no financial relationship with Steadyhand other than the fact that they’ve bought me lunch a couple of times. It would take a lot more than that to stop me from saying what I really think!) The summary on fees in their example of two investors with $250,000 portfolios is that Steadyhand funds charge about 0.55% per year more than the total costs of running an ETF portfolio. The burning question is whether Steadyhand offers enough benefits to make up for this additional cost of $1375 per year. Here are some of the ways that Steadyhand might earn their extra fees: – ease of getting started – investing advice on asset allocation – calming influence when you’re about to do something foolish and expensive out of greed or fear (a steady hand) – possible higher returns Although I wish them well, I...

Much time and effort goes into searching for stock market inefficiencies that can be exploited for profit. Former string theorists work together developing algorithms to comb through historical data looking for persistent patterns. The problem is that once we find a strategy to exploit an anomaly and it becomes widely-known, it stops working. There is one pattern that I bank on, though. There are those who try to make money from momentum effects and others who believe in “sell in May and go away” until November because stocks have performed poorly in summer. I don’t trust these approaches because they seem like just the sort of thing that would stop working if too many people used them. If everyone believed in “sell in May and go away” then we could anticipate a big sell-off in May and a rise in November. So the right thing to do would be to sell before May and buy before November. But if too many people did this, the right strategy would change again. There is one stock ma...

Big Cajun Man reports that Costco is selling gas for about 5 cents less per litre than other stations. Canadian Financial DIY thinks very highly of the book Financial Statement Analysis . I'm not a fan of trying to beat the market by selecting stocks, but if you're going to try you must be able to read financial statements. The Blunt Bean Counter has some first-hand experience observing how people react to big cash windfalls. Canadian Couch Potato reviews the book Millionaire Teacher . Retire Happy Blog outlines the 3 basic steps to creating a retirement plan.

A widely-held belief is that the world contains a small number of financial geniuses who know what is going to happen in the stock markets and who make obscene amounts of money with their trading. With this world-view, the goal for the rest of us is to become a financial genius or hand over the reins of our investments to someone who is a financial genius. When I first started getting serious about investing, I began by trying to pick the right financial genius running some mutual fund to invest my money. When this didn't work out, I set out to read every book I could find about investing and become a financial genius myself. In the end I discovered I was heading in the wrong direction. The secret to successful investing is not making brilliant moves, but failing to make serious mistakes. Rather than trying to outdo other investors, the best strategy for most of us is to avoid doing anything stupid. Almost all of us are best off just trying to match the stock and bond mar...

Most of us have heard that it is good to hold asset classes with low or negative correlation. The informal explanation for this is that risk is lower because when one asset class, such as stocks, is going down, another asset class, such as bonds, is going up. However, this explanation is misleading. It is possible for two investments to both be going up over a period of time, but have negative correlation. Consider the following example: Investment A earns either 2% or 20% each year based on a 50/50 coin toss. Investments B, C, and D do the same. Investment B's return is based on the same coin as A uses. Investment C uses its own independent coin. Investment D does the opposite of A's coin. All 4 investments have an expected compound return of 10.63% (for math geeks, this is 1 less than the square root of 1.02 x 1.20). Even though the investments all look the same based on their returns, their correlations are different: A and B are +100% correlated (perfect cor...

Canadian Couch Potato took a detailed look at whether leveraged ETFs can cause market instability including links to other opinions on the subject. Missing in the various articles I read was a clear and simple explanation of the forces that can cause leveraged ETFs to add to market volatility. 2X Bull ETF Consider first an ETF that seeks to give double the daily return of a given stock index. Suppose that investors have invested a total of $100 million. There are many ways for an ETF to gain double exposure, but we'll look at a simple method: the ETF borrows another $100 million and buys $200 million worth of index stocks. At the start of the day the ETF holdings are Stock: $200M Cash: -$100M The ETF's goal is to maintain a 2:1 ratio between stocks and borrowed cash. Let's now look at what happens on a volatile day. If stocks go up 5%, the holdings are now Stock: $210M Cash: -$100M At the end of the day, the ETF has to borrow another $10 million to b...