This book demonstrates successful investing based on:
- diversified passive index funds
- asset classes identified as 1) equities - broken down into Canadian, US value, large and small cap, International (he doesn't specify but presumably meaning developed economies) - value, large and small cap, and Emerging Market countries; 2) Real Estate Investment Trusts (REITs) - Canadian, US and Global; 3) Fixed Income - broken down into government and corporate bonds and real return bonds
- low fee/cost funds after-tax
- a written investment policy that considers one's life plan
Several things I looked for but did not find would improve the content.
- Discussion of rebalancing the portfolio over time as asset classes move out of their initial proportions. What are practical rules - e.g. time-based once a year, or when a class varies more than a certain percentage?
- Explanation of real return bonds as asset class, using the same illustrations and tables as for the others
- Show sample portfolios with actual ETF ticker symbols and percentage allocations with a line or two mini-case explanation. Some people, like me, like to learn by example. On pages 57-59, the discussion of Dimensional Fund Advisor mutual funds should mention more explicitly that these funds are not available to self-directed investors, and can only be bought through advisors.
- Chapter 12 on pension funds cursorily mentions a few principles for determining how much (what percentage) to put in each asset class. This topic is so fundamental that even an an overview book such as this must address it in more detail. I think the approach must derive from a person's overall financial condition, including his/her occupation, its stability, income level and pension plan. For example, a 55 year old civil servant with 30 years service has high job security, and a defined benefit inflation-adjusted lifetime pension plan sufficient for retirement that is equivalent to a gigantic real return bond (e.g. the present value of a perpetual $50,000 income stream at 3% real return is 50,000/.03 = $1.7 million). I'd question whether such a person should invest even a penny in fixed income whatever his/her nervousness about volatility (which I'd venture to say is higher that the average private sector worker since the whole ethos of government and its workers is to prevent, minimize and avoid risk - "we never expect praise, we just want to avoid criticism").
The complete table of contents can be found at the book website http://www.empoweredinvestor.ca/. The book can be purchased there as well.
Matthews was kind enough to send me gratis a copy of the book and to agree to answer some questions I threw at him. The email interview follows below and readers will be pleased to note that he practices what he preaches by holding a diversified portfolio based on asset classes discussed in the book! If you want to reach him, his website even includes his email address firstname.lastname@example.org.
My rating: 4 out of 5 stars.
Q1 - Do you think investors should always have an investment advisor? Do you use one yourself?
To begin, I am a portfolio manager that works at Montreal based firm providing discretionary portfolio management & wealth management services. This is an important disclosure in that it sheds some light on my responses.
I do not think that all investors need to have an investment advisor. If an investor has informed themselves well, have seen enough (or studied enough) economic cycles, and finally has the right mind set to control their emotions, then with the asset class investment vehicles (notably ETFs) available in the market place today;; then and only then would I feel comfortable & confident that they could build, monitor and rebalance their investment portfolios over time. At minimum, there is always a need for objective planning (retirement & estate) that these individuals could follow-up on with a fee-only advanced financial planner.
However, what I have witnessed and seen over the years is that most individual investors (novice or advanced) are not necessarily “wired” to oversee their personal investments. There is still too much performance chasing (asset class, sectors, and companies) which can hamper an investment experience. Not with standing the complexity of trying to plan and oversee a well diversified portfolio. So – I do believe that the majority of investors (large, small, novice and advanced) can benefit from a reasonably priced asset management & wealth management service…if anything simply to keep them on track and away from investment pitfalls, and to ensure that the details in the execution are taken care of.
The good news is that there is a growing group of “unbiased & objective” advisors in Canada. While a decade ago, there was minimal selection, today the list of qualified advisors submitting to principles found in the book in growing rapidly.
Q2 - Do you think investors should make any changes or adjustments in light of the current financial / economic situation?
The asset mix should have been one that was set knowing that equities correct in price every 5 to 7 years. So the short answer is “not really”. It is my view that this current economic situation as difficult as it is (and it is a difficult one) should not require any rethinking on the long-term asset mix. Investors in equities should have a minimum 10 to 20 year horizon, and should think accordingly. Gradual rebalancing from fixed income to equities should however be taking place with the new asset class levels in a diversified portfolio. If anything, I think that many investors may want to rethink the way they have invested up till now. Unfortunately sometimes it takes a crisis for many investors to want to reevaluate their portfolio, portfolio methodology or even portfolio service. I propose that investors unhappy with their portfolios should rethink the way they invest. Here are some of my thoughts on this point:
8 tips to rethink the way you invest:
- Do not build your portfolio on bold forecasts
- Do not chase past returns as they are random
- Do not invest in alternative investments as they are too risky
- Be aware of and stay clear of investment pitfalls
- Invest in asset classes and not “star managers”
- Build a diversified portfolio using asset class investments
- Hire a firm with an investment process and plan for you
- Insist on full transparency and investment reporting
Q3 - What do you hold and in what proportions in your own portfolio? ... I'm more interested in the reasoning behind it than finding out how rich you are!
I am 45 years of age with a long-term investment horizon. My asset allocation would look something like this.
25 % Short-term Canadian bonds
10% S&P/TSX 60 Index (iShare)
21% DFA Canadian core companies
9% IVV (iShare)
7% DFA U.S value companies
6% DFA U.S. small companies
9% VEA (Vanguard Europe & Asia)
7% DFA international value companies
6% DFA international small companies
Q4 - How do you suggest coping with multiple and uncertain time horizons e.g. retirement (people sometimes don't retire when they expect), illness, kids' university, marriage/divorce, death (who knows how long they will live)? Should one have different buckets of money - short-term vs medium vs long-term? Or is it not an investment question at all - insurance the answer?
Different buckets of assets matched to different liabilities or obligations is an interesting wealth management concept. Where it is applicable – it can be used. It is an investor friendly concept that is easy-to-understand by investors. Short and medium term liabilities should be matched off with short-to-mid term secure bonds. Longer-term obligations such as legacy goals can be positioned in diversified equities.
Uncertain time horizons is the most challenging concept in this questions. This is an element of “human, life and work related risk” that is often completely out of our control. I do not think that there is an easy way around this one. However, I do think that you always have to plan for the longest period but also have to ideally have a short term contingency plan in place (ie available secure funds) – so that if something was to happen, long-term assets would not need to be used. For any individual who finds themselves in the unfortunate position of having to retire earlier than expected – I think that there are some tough choices to make. If a person is able to still work – then they must pursue new work opportunities (even if it is less interesting and less pay than the previous job). If this cannot materialize then they must prepare themselves to reduce lifestyle or stay in the work force (perhaps even on a part time basis) for many additional years. Unfortunately there is no magic or easy way out.
Health and disability risks should be managed by insurance.
Q5 - In chapter 18, you mention expected future real returns for US and Canadian equities of 3.5% to 4.5% over t-bills in the coming decades. What would be the numbers for the international equities that you suggest a portfolio should have for proper diversification?
On page 148 International equities are also mentioned with U.S. and Canadian as having t-bills + 3.5% to 4.5%.
For a Canadian investor, having 50 to 70% of their total equity weighting in non-Canadian equities makes sense. This percentage removes bonds from this calculation. However, many Canadians however have a “home bias” and have higher Canadian equity concentration levels. So there is an opportunity for Canadians to shift away from Canadian centric and commodity weighted portfolios to a more diversified global portfolio.
Q6 - You say in the intro that writing the book has been an amazing experience? How? Did any of your thoughts or philosophies of investing change in the course of preparing the book?
It had been an amazing opportunity for many reasons. Firstly, the book writing experience has made me a better communicator of investment concepts. Writing a book forces the writer to cut through the noise and the blur and get to a point of clarity and consistency – and this is good. I feel that I experienced this. The investment business is often complex and cloudy for investors. Writing a book and/or providing a clear investment message (in a world of complex marketing) was a challenge that I enjoyed and wanted to undertake.
Secondly, my clients provided much input into the language used in the 10 Principles to Successful Investing and obtaining this feedback was an absolutely terrific personal experience. This feedback was so much appreciated and in essence validated the concepts that would be further expanded upon in the book. If it was important to my clients and had an impact on them, then I knew that the book would connect with – real people.
Lastly, I knew that while I was writing the second edition, that the content (and the style of the content) would have a positive impact on investors. The feedback from many readers of the first version surpassed my expectations and I received many email notes of thanks from readers across Canada – and so I had this in the back of my head while I was writing the New & Expanded version. This was a very motivating thought and I enjoyed that.