It’s important to read books and articles that make arguments that are at odds with your current thinking once in a while. Understanding counter-arguments is a good way to make sure your reasoning is sound. After all, I would never have stopped stock-picking if I hadn’t read about indexing with an open mind. With that in mind, I read an Investopedia article entitled “ 5 Reasons to Avoid Index Funds .” Here I go through the arguments made in this article. 1. Lack of Downside Protection It’s true that index portfolios do not prevent short-term losses. Just think of how much more money you could make if you could always trade out of stocks that were about to drop. The Investopedia article points to several strategies for making money when you know the market will drop. The problem is that you don’t know when the market will drop. As a matter of fact, most of the time that investors try to time the market, they end up making less than if they had just stayed invested in the ind...

I wrote one post this week answering a reader question about why index portfolios don’t all use dividend ETFs: Why don’t couch potato portfolios use dividend ETFs? Here are some short takes and some weekend reading: A Wealth of Common Sense explains a cognitive bias we have that prevents us from admitting we don’t know something. This bias can be very costly for investors. Another good article demonstrates that envy is a bigger driver than greed . The second minute of the monkey experiment video is funny. Jason Zweig explains why you should be concerned if you receive a “happiness letter” from your brokerage. In another good article, he looks back at his 1999 advice to avoid internet stocks . His was nearly a lone voice at the time. I was very fortunate that I decided to mostly avoid internet stocks through that period because I worked for an internet company and didn’t want to put too many eggs in one basket. Big Cajun Man reports that unemployment in Canada has bee...

A reader, L.P., asks the following question (edited for length and clarity): “Why don’t sample couch potato portfolios in books and blogs use dividend ETFs for the equity portion? Wouldn't an ETF like VDY outperform XIU over the long haul? Long-term dividend investing has good historical returns. Higher dividends can accumulate over the long run. I'd imagine that a dividend ETF full of solid dividend payers would correlate closely with the general market performance if not slightly better in downturns? Is my thinking off?” Thanks for the thoughtful question. First off, let me say that dividend investing can be a reasonable approach as long as investors are well diversified. Certainly, an ETF like Vanguard’s VDY is reasonably well diversified within Canada. However, some dividend investors go off the rails when they convince themselves that dividend-paying companies are much better than other companies. Dividend stocks tend to be value stocks. An ETF like VDY will ...

Here are my posts for this week: Flash Boys A Deeper Look at My Portfolio Here are some short takes and some weekend reading: Dan Hallett looks at the options for how a surviving spouse should manage a portfolio after a DIY-investor dies. My strategy has been to have my wife do all the trading in her own accounts. Slowly but surely she is learning the details of our fairly straightforward portfolio strategy. Preet Banerjee reports on a study showing that professional fund managers in Sweden don’t manage their personal portfolios any better than non-experts in the same socio-economic class. I hope the study’s authors split people into classes by their wealth before the time period of study and not after. Otherwise, the results are biased. Wealthier classes always have some people who were in a lower class but got lucky taking big investment risks. Tom Bradley at Steadyhand takes some shots at index-linked GICs offered by Canada’s big banks. I’ve never seen one of t...

I recently revealed my portfolio’s asset allocation and the reasoning behind it . It consists of just 4 Exchange Traded Funds (ETFs). This might make some think that I’m not sufficiently diversified. To explain why this isn’t true, I’ll take a deeper look at these ETFs. I’ll also go over many of portfolio costs that investors face. The following chart gives some basic information about the ETFs in my portfolio: ETF Allocation Asset Class # Stocks MER Purchase Currency VCN 30% Canadian 248 0.05% C$ VTI 25% U.S. 3772 0.05% US$ VBR 20% U.S. Small Cap Value 812 0.09% US$ VXUS 25% World ex. U.S. 5783 0.14% US$ Diversification If we focus initially on the “# Stocks” column, we see that each ETF contains within it a large number of individual stocks....

You wouldn’t think that a book about high-frequency stock trading could be a compelling read, but Michael Lewis’s story-telling skills make his book Flash Boys a page-turner even for readers with a modest knowledge of stock trading. I’ve read several articles explaining high-frequency trading (HFT), but Lewis weaves much clearer explanations in with the stories of the people who set out to stop high-frequency traders from exploiting the rest of us. The book describes many ways that high-frequency traders get an unfair advantage, but the biggest problem was a form of front-running. Stock trades often get split up among different exchanges because no one exchange is offering enough shares to fill the order. High-frequency traders would place “very small bids and offers, typically for 100 shares, for every listed stock. Having gleaned that there was a buyer or seller of Company X’s shares, they would race ahead to the other exchanges and buy or sell accordingly.” So, whichever exc...

I wrote one post this week revealing my asset allocation and my reasoning behind it: My Asset Allocation Here are some short takes and some weekend reading: The Blunt Bean Counter looks into the tax implications of crowdfunding. Potato looks at a wide range of choices for implementing a passive index investing plan. He rates them by simplicity and costs. Big Cajun Man reports that TD Waterhouse has made it easier to make transactions in their RDSP accounts. My Own Advisor reviews the book The Empowered Investor . Million Dollar Journey shows how to figure out where your hydro dollars are going.