I've recently come across some fascinating reading by York University professor Moshe Milevsky on the subject of residential real estate and personal financial risk. One of his many papers, titled Houset Allocation (yes, it is spelled with the "t"), which is available at IFID website newsletters, shows rates of return on Canadian residential real estate in 19 housing markets across the country for the 25 years ending in 2004 when the paper was written. The annual compound rates of return vary considerably - from a low of 2.74% in Edmonton to a high of 6.23% in Peterborough. Along with these are the measure of volatility, or risk, in each market, again with a wide range from 2.81% in Regina to 11.14% in Vancouver. These figures alone remind one that owning a house as an investment isn't necessarily the best, considering options which include stock markets like the TSX and the S&P 500. Would one have been better (if one had perfect knowledge of the future, of course, which we all do in retrospect ;-) having a house in Vancouver that returned 3.68% per year compounded for 25 years at 11.14% volatility, or 13.85% in the S&P 500 with 15.71% volatility or a higher 5.7% return with lower 6.23% volatility in Ottawa, where my house is?
How about the homeowner in Edmonton, facing the laggard market there for 25 years? He/she might even have thought that the tar sands would one day have to take off and cause the local house price boom that is now underway. Sitting there in 2004, how much longer should he/she wait? Maybe a job change or retirement would force a sale, preventing the gain from ever being achieved. Years ago, I bought a condo in Ottawa at the same price the original owner had paid five years earlier, then there was a bump in prices and I sold it for a 250% gain six years later, pure luck because I needed to move with my growing family into my larger house. That house bought 22 years ago, well maintained and in a good neighbourhood, has only appreciated 4.8%, i.e. below the Ottawa average. The long term can be a very long, one just doesn't know how long.
One of my relatives lost their whole investment in their house when the mill in their small town closed down and there were no buyers so they had to walk away from it. An individual asset risk of a specific house in a specific market is not a sure investment gain. That is a key point made by Mr. Milovesky in the above paper, namely that a house is a non-diversified investment. It is also likely a huge proportion of a family's total investment assets. It certainly is a big part of my net worth. If one were able to own several houses in different cities across Canada, the low correlation of price gains between the cities would allow a considerable reduction in risk. He even proposes that housing REITs be set up along the lines of commercial property REITs so that each of us could sell a part stake in our houses and buy someone else's. He says it's been done in the UK and Australia but not yet here in Canada.
As an asset class on the other hand, a house is quite un-correlated to stock markets. Ottawa residences were negatively correlated with both the TSX and the S&P 500 over his study period and so are good to hold in a portfolio. In any individual period, as opposed to the long term during which they both go up, when one goes down the other asset class goes up and this reduces risk.
Among the options Mr. Milevsky reviews for reducing housing risk for individual homeowners, only the reverse mortgage is currently available in Canada. Given the fixation of many people on the tax-free capital gain on a principal residence as being a kind of be-all, end-all justification for owning a house in Canada, the above certainly warrants some thought. I'm keeping my house but whenever the housing REIT comes along I'll be having a close look, and the reverse mortgage is a good option to know for the future too.
Wednesday 28 February 2007
Monday 26 February 2007
Online Sources - Mortgage, Annuity, Retirement
Just discovered a couple of interesting websites that may useful to others:
- https://www.cannex.com/canada/english/ in reality oriented to institutions and professionals but it has some free, constantly updated tables for mortgages, annuities, bank deposit accounts, RRIFs, GICs
- http://www.ifid.ca/ the Individual Finance and Decisions Center supports research into quantitative wealth and risk management for individuals, especially retirement topics, annuities and the like; much of the material is technical/mathematical but it has reprints from general press articles based on the research; one paper titled Can Buckets Bail-Out a Poor Sequence of Investment Returns? under the Personal Finance Articles compares the results for a retiree whose portfolio is invested in a balanced fund vs another who holds a combination of cash and equities, but they use different withdrawal strategies.
- http://www.soa.org/ the Society of Actuaries website has a free downloadable software package at http://www.soa.org/ccm/content/areas-of-practice/retirement-pension/research/retirement-probability-analyzer-software/
that allows you to estimate whether you will run out money in retirement using various assumptions about age of death, interest rates, investment in annuities vs stocks, bonds
- https://www.cannex.com/canada/english/ in reality oriented to institutions and professionals but it has some free, constantly updated tables for mortgages, annuities, bank deposit accounts, RRIFs, GICs
- http://www.ifid.ca/ the Individual Finance and Decisions Center supports research into quantitative wealth and risk management for individuals, especially retirement topics, annuities and the like; much of the material is technical/mathematical but it has reprints from general press articles based on the research; one paper titled Can Buckets Bail-Out a Poor Sequence of Investment Returns? under the Personal Finance Articles compares the results for a retiree whose portfolio is invested in a balanced fund vs another who holds a combination of cash and equities, but they use different withdrawal strategies.
- http://www.soa.org/ the Society of Actuaries website has a free downloadable software package at http://www.soa.org/ccm/content/areas-of-practice/retirement-pension/research/retirement-probability-analyzer-software/
that allows you to estimate whether you will run out money in retirement using various assumptions about age of death, interest rates, investment in annuities vs stocks, bonds
Labels:
annuities,
rates,
retirement,
risk,
software
Sunday 25 February 2007
Book Review: KPMG's Tax Planning for You and Your Family
This book has been a repeat purchase for me for a number of years and I note that the publisher Thomson Carswell has the 2007 available for ordering on its website. The topic coverage extends to pretty well all the common individual/family taxpayer situations, as can be seen on the above website, which displays the whole table of contents. The book can serve as both a reference manual to be used when a specific topic needs to be explored and a more general guide to be read for discovering new ideas that could be beneficial. In its 370-odd pages, the book covers a wide range of tax and financial topics and has been extremely useful to this do-it-yourself financial manager over the years. I would characterize it as addressing the intermediate to advanced level DIY person, though any intelligent beginner who is willing to read carefully could benefit. As much as the topic coverage, its usefulness stems from the presentation. The text is rife with appropriate references to other sections of the book where exceptions, special conditions and corollary information can influence what one should do. Each chapter has a list of pertinent CRA forms, bulletins and other documents that can save a lot of time poking around CRA's website. The Index is lengthy enough at about 18 pages to be a prime search tool. Since even DIY has its limits, the book inserts warnings when some action is so tricky or involved (usually it relates to legal matters and setting something up properly so one doesn't get caught out later) that expert professional advice is advisable, though I would say the book errs a little on the cautious side with such warnings. The writing style is direct, grammatical, logical and precise - just what is required to understand and take action. There are realistic mini scenarios with numbers to illustrate trickier points. All through the text there are suggestions for what a taxpayer can do to minimize taxes.
In summary, short of becoming a tax lawyer or an accountant, this is the most comprehensive, detailed and understandable book I've found for a serious DIY financial person.
In summary, short of becoming a tax lawyer or an accountant, this is the most comprehensive, detailed and understandable book I've found for a serious DIY financial person.
Labels:
book review,
KPMG,
taxes
Friday 23 February 2007
RESP vs RRSP - The Best Approach is Clear
Update 2008...
Last year I compared a choice that parents often face - whether to contribute to an RESP for a child's education or to an RRSP - and concluded that the RESP was the better option. The maximum CESG (Canada Education Savings Grant) has gone up from $400 to $500 per year. That means the RESP contribution required to obtain the maximum amount of grant money from the federal government goes up to $2500, since the CESG is calculated as 20% of the contribution up to the maximum grant. The good news for 2007 and beyond is that last year's conclusion is the same - that the RESP is better. If you can contribute to both your RRSP and an RESP then by all means do so but if you have limited funds the RESP is the way to go.
Here is how and why that is so. Unlike this analysis by Jamie Golombek in the Financial Post that concludes "All things considered, perhaps the best plan is both plans.", and this Financial Post report of February 4, 2008, my own analysis shows that up to $2500 the RESP is a better choice.
First, I assume that a parent does not care whether he/she benefits or the child does and that the maximization of family wealth down the road after taxes is what counts. I have used similar assumptions about rates of return as Mr. Golombek just for convenience but my analysis is different to simplify and to clarify i.e. to compare only apples with oranges and not throw in lemons as well. Referring to the spreadsheet table ...in contributing $2500 to an RRSP, a taxpayer will receive a tax refund, which I assume to be calculated at the next to top Ontario marginal tax rate of 43.41%. That refund is assumed to be added back into the RRSP and the tax refund on the tax refund is also assumed to be reinvested. I've extended that chain of reinvesting the refunds for five years, until the amount gets very small (under $17 by year 5). Unlike Mr. Golombek I don't assume that the RRSP tax refund will be reinvested outside the RRSP in a some stock that produces capital gains. That element is the lemons I mentioned above. The reinvestment assumption enhances the RRSP option since the compounding occurs tax-exempt. The higher marginal tax rate also enhances the RRSP option since that will produce a bigger refund to invest at the beginning and a lower tax imposed upon withdrawal. For the RESP contributor, there is no tax refund to reinvest, only the $500 CESG grant to add to the initial investment amount.
I assume that the investments both earn 6% compounded for 18 years, which is the length of time Mr. Golombek sensibly uses since that is a normal maximum duration of contributions before a child enters post-secondary education. How long the compounding period lasts doesn't matter at all to the conclusion however, it just increases or decreases the advantage of the better choice. The 6% return is used for inside both the RESP and the RRSP, a cautious low number, indicating some sort of fixed income plus conservative equity investment. That rate doesn't matter either if it is the same for both.
Another thing (perhaps?) neglected by Mr. Golombek is that only the income from the RESP is taxable; contributions can be withdrawn tax free by the parent, the CRA logic being that the parent had already paid tax on them way back at the beginning. My last assumption (also not discussed by Mr. Golombek) is that the parent's tax rate is less when the RRSP money is withdrawn after 18 years since by then they will hopefully be retired. Whether or not the money would actually be withdrawn, the fact that there is a tax liability for funds within an RRSP needs to be taken into account. The lower withdrawal tax rate favours the RRSP option as well but alas, it is not enough! The only combination that makes the RRSP better than the RESP is when the parent's tax rate at time of contribution is very high and the rate at time of withdrawal is very low, e.g. the highest marginal rate of 46.41% (taxable income over $123,000) with the rate five brackets lower of 31.15% (taxable income of $37,885 to $63,428). How likely is that to happen?
Of course, if the primary objective is to save for a child's education then the RESP is the vehicle of choice. Using an RRSP to save, for 18 years in my example, would probably mean a much lower net return since the advantage of a lower tax rate at time of withdrawal, one of the essential benefits of RRSP investing, would be lost if the parent was in the peak of earning years and not retired. It might even be that the tax rate would be higher at withdrawal if the parent advanced to better pay in is/her career.
With both RESPs and RRSPs benefiting from tax-free compounding while a plan is in existence, the combined effect of income splitting with the child, who is highly likely to have little or no income tax to pay while in higher education, along with the CESG, make the RESP a better option by $55. BUT, the RESP advantage disappears for contributions over $2500. I haven't shown that table but remove the $500 CESG and redo the arithmetic to see it. Change the withdrawal tax rate up one bracket to 32.98% and the RESP is now ahead by $281. The RESP advantage also disappears when the student earns a lot and has to pay taxes, as in scenario 2, where the RRSP option is $1221 ahead after 18 years.
The example given in the Feb.4th FP article of putting $5000 into the RRSP and then putting the tax refund into the RESP produces less total wealth (RESP+RRSP value) after 18 years, considering the tax liability of the RRSP, than putting the first $2500 into the RESP and the remaining amount of $2500 into the RRSP - by $394.47 using the above base assumptions. In addition, whereas the RESP-first option produces an almost equal amount in each of the RESP and the RRSP, the FP way results in almost $3,000 less in the RESP. The differentiator is that the FP does not take advantage of the maximum CESG contribution.
Of course, there is a risk that children may not eventually attend high education. The rules do allow up to $50,000 to be transferred into the parent's RRSP in that case, providing there is contribution room. The CESG would be reclaimed by the government so that would be lost. The RESP would be less attractive in that case. The higher the level of education of the parents, the higher the chances of the children attending post-secondary education according to this Federal Government study. The same study says that in 2003, only 18% of families with children under 18 had an RESP. That's a shame since the higher education participation rate is higher than 18% so the CESG/RESP combination is thus much under-utilized.
In summary, to maximize family wealth, put the first $2500 into the RESP. After that, it goes into the RRSP.
Oh, and make sure the financial institution administering the RESP actually submits the form to the government to collect the all-important CESG; it happened more than once that my financial institution forgot to do so and I had to remind them.
Thursday 22 February 2007
RRSP Contributions in Kind - Beware of the Quirks
In case this helps anyone, here is a quirk of the way the CRA treats contributions in kind to an RRSP that almost caught me unawares a few years ago. It is possible to contribute shares or other eligible investments, for example from a non-registered account, to an RRSP and count the market value as a contribution. This avoids needing to make a cash outlay to contribute.
However, one needs to be aware of two things. First, there is a deemed disposition of the shares according to CRA rules, triggering capital gains and potential tax to pay on that gain. Second, and this is what almost caught me, there is not a corresponding deemed capital loss! One must actually sell the shares and realize the loss. One can transfer the cash and repurchase the exact same shares within the RRSP, after the 30-day waiting rule.
I am so glad to have bought the KPMG Tax Planning For You and Your Family book available from the publisher Carswell, which explains this subtlety. It avoided me missing out on those juicy capital losses on Nortel stock (no, I did not repurchase the Nortel in my RRSP).
However, one needs to be aware of two things. First, there is a deemed disposition of the shares according to CRA rules, triggering capital gains and potential tax to pay on that gain. Second, and this is what almost caught me, there is not a corresponding deemed capital loss! One must actually sell the shares and realize the loss. One can transfer the cash and repurchase the exact same shares within the RRSP, after the 30-day waiting rule.
I am so glad to have bought the KPMG Tax Planning For You and Your Family book available from the publisher Carswell, which explains this subtlety. It avoided me missing out on those juicy capital losses on Nortel stock (no, I did not repurchase the Nortel in my RRSP).
Wednesday 21 February 2007
Making Money or Giving It Away - Challenges are the Same!
One of the pleasures of making money is being in a position to give some of it away to charity. After all, as they say here is Scotland, shrouds don't have pockets. And I'd rather give it away myself than have the government do it for me. Once a DIY, always a DIY. However, given the effort and difficulties required to make the money in the first place, one doesn't want to simply squander it on bad or ineffective charities, of which I would guess there is the same range of fraudulent/incompetent to outstanding as there is in the investment industry.
It turns out that giving money away to good purpose is as difficult as, and requires many of the same competencies as, doing investment evaluation. Indeed, those who are good at making money seem to be pretty competent at giving it away when they are so inclined (Bill Gates of Microsoft comes to mind). In Canada in 2004, the Canada Revenue Agency is said to have estimated that there were more than 82,000 charities! One can even donate online - in Canada there is CanadaHelps.org. Assessment is a chore. For instance, the principle that overhead expenses should be minimized so that the maximum amount goes to the actual charity work is not so cut and dried as this article discusses. There is both over and under-investment in administration. Ideal ratios vary by type of charity work. There are performance metrics to compile and examine. And some charities pretend that their fundraising activities are separate from their program activities so that they can look good and state that all of the public's donations go to program work - sounds parallel to corporate tricks like off-balance sheet debt, n'est-ce pas? Not surprisingly, there are even advisor type charity ratings services like this, and this.
So, what's a person to do? What I've come to is what could be termed a following an informal mixture of Warren Buffett and Peter Lynch, i.e. select those charities one knows well, ignore diversification and choose a limited number.
One charity that passes muster for me is Child Haven International run by a couple who lived the talk of their work and adopted 21 children as this account details. I had occasion to attend a fund-raising dinner of Child Haven a few years ago and was highly amused by the difference in the way they came across when they spoke and the way the Ottawa TV station CJOH reported the event. The TV report was all about Fred and Bonnie Cappuccino as such wonderful people, which they truly are, but their modest and self-effacing remarks were all about the children and the work. They showed lots and lots of photos of smiling children, visible results of the work. Their solicitation materials are done very inexpensively, unlike the slick stuff produced by big-time marketers (a sign to me that a charity is spending too much on that administration/ overhead line item). It's a pleasure to give Child Haven money.
It turns out that giving money away to good purpose is as difficult as, and requires many of the same competencies as, doing investment evaluation. Indeed, those who are good at making money seem to be pretty competent at giving it away when they are so inclined (Bill Gates of Microsoft comes to mind). In Canada in 2004, the Canada Revenue Agency is said to have estimated that there were more than 82,000 charities! One can even donate online - in Canada there is CanadaHelps.org. Assessment is a chore. For instance, the principle that overhead expenses should be minimized so that the maximum amount goes to the actual charity work is not so cut and dried as this article discusses. There is both over and under-investment in administration. Ideal ratios vary by type of charity work. There are performance metrics to compile and examine. And some charities pretend that their fundraising activities are separate from their program activities so that they can look good and state that all of the public's donations go to program work - sounds parallel to corporate tricks like off-balance sheet debt, n'est-ce pas? Not surprisingly, there are even advisor type charity ratings services like this, and this.
So, what's a person to do? What I've come to is what could be termed a following an informal mixture of Warren Buffett and Peter Lynch, i.e. select those charities one knows well, ignore diversification and choose a limited number.
One charity that passes muster for me is Child Haven International run by a couple who lived the talk of their work and adopted 21 children as this account details. I had occasion to attend a fund-raising dinner of Child Haven a few years ago and was highly amused by the difference in the way they came across when they spoke and the way the Ottawa TV station CJOH reported the event. The TV report was all about Fred and Bonnie Cappuccino as such wonderful people, which they truly are, but their modest and self-effacing remarks were all about the children and the work. They showed lots and lots of photos of smiling children, visible results of the work. Their solicitation materials are done very inexpensively, unlike the slick stuff produced by big-time marketers (a sign to me that a charity is spending too much on that administration/ overhead line item). It's a pleasure to give Child Haven money.
Labels:
Charity
Tuesday 20 February 2007
Duplication of Stock Holdings in Canadian iShares ETFs
It has been noted often in the past that actively managed Canadian equity mutual funds suffer a great deal from portfolio overlap due to the small number of companies on the TSX. It is hardly useful to buy several different mutual funds since they end holding more or less the same stocks. That has led me to wonder to what degree the same problem confronts the iShares Exchange Traded Funds. The various funds bear names that suggest different specializations and thus different holdings.
The image shows the summary of the spreadsheet analysis I compiled from the fund holdings on the iShares website as of February 20th. My conclusions are graphically summarized as red = bad, green = good and yellow = mediocre choices of fund combinations. Another way of saying this is that when the overlap of the fund holdings is too great (the red combos), it isn't worth holding both funds since one ends up with more or less the same holdings.
Based on that principle, XIU (iShares TSX 60 Large Cap) and XMD (Mid-Cap) have zero overlap (green cells) and make sense as a combination). So too are XIU and XRE (Real Estate Trusts). On the other hand, XIU with XEG (Energy stocks), XFN (Financial companies) or XDV (Dividend stocks) have too much overlap and do not make sense. XDV and XFN are more or less the same thing, being dominated by the banks. One might even wonder if the XFN and XMD are worth the 0.55% and 0.5% MERs respectively, instead of simply buying the stocks directly. Several funds are so concentrated on a few holdings that they are virtually a play on a couple of stocks. XIT (Information Technology) has only nine holdings and Nortel, RIM and Cognos make up 67% of its total value. ... highly risky if the past is any guide. XMD is a good Canadian compromise - it is middle of the road and has a bit of everything. The last combination that are more less the same thing is XGD (Gold) and XMA (Materials). XMA is more diversified with 61 holdings vs only 30 in XGD.
The number of holdings across all these nine specialty funds is still less than the TSX as a whole, with only 241 separate equities, against 273 in XIC, which is iShares' TSX market fund.
Now that I know, guess I'll have to simplify my portfolio some to eliminate the useless duplications.
Labels:
diversification,
ETF,
iShares Canada,
portfolio
Friday 16 February 2007
Beat This as Worst Investment Ever
It was a doozy indeed, minus 100% return! Yup, I managed to invest a bundle in a TSX-listed company that went bankrupt. In the hopes that someone out there might avoid the same mistake, here's the story of Intelligent Detection Systems.
Once upon a time there was an ultra-aggressive entrepreneur named Mariusz Rybak, whose nickname, I have since learned, was the Baltic Barracuda. That alone might be some cause for concern, though one suspects other ruthless business tycoons have acquired colourful sobriquets from employees, associates and competitors. In retrospect, familiar problems appear to have sunk the company such as overly ambitious expansion, including into areas where management had little or no knowledge. The epitome of this was the plan to launch an online eCommerce portal to trade in mining equipment and services ... at the height of the Internet frenzy in early 2000. A dash of nepotism, in the form of Mr. Rybak's brother Andy as a top manager, could also have provided a warning sign. Yet the company actually had as its core a useful and successful product - bomb detection systems for airports - so it was easy to fool oneself. In fact, the detection product was acquired by another company and it still being sold today, six and a half years after the downfall. Again in retrospect, a strong-willed and aggressive CEO founder, was likely able to bend the board of directors to his unwise plans when the company was public. On top of that, the CEO liked to live high and well, with corporate offices in the big towers on Bay Street. And finally, in retrospect as well, a CEO who did not pay too much attention to "accounting details", as he said (see Bagnall article links below) when improprieties were uncovered by auditors.
Mr. Rybak did not lose his shirt however, as he now lives in a luxury condo in Monaco. And he did not lose his self-confidence or his talent for wreaking financial mayhem (or worse?), being subsequently one of the main protagonists in the even larger Langbar scandal that has garnered much attention over here in the UK. James Bagnall of the Ottawa Citizen wrote a couple of extended articles about the man and his exploits - in December 2005, December 2006. Is it an accident that the old IDS weblink points to a website about law enforcement?
The ancient Romans invented the appropriate expressions in Latin, MEA CULPA and CAVEAT EMPTOR. Every time I open my online account listing, I see that line with IDS and $0.00 market value beside the $xx,xxx book value to remind me.
Once upon a time there was an ultra-aggressive entrepreneur named Mariusz Rybak, whose nickname, I have since learned, was the Baltic Barracuda. That alone might be some cause for concern, though one suspects other ruthless business tycoons have acquired colourful sobriquets from employees, associates and competitors. In retrospect, familiar problems appear to have sunk the company such as overly ambitious expansion, including into areas where management had little or no knowledge. The epitome of this was the plan to launch an online eCommerce portal to trade in mining equipment and services ... at the height of the Internet frenzy in early 2000. A dash of nepotism, in the form of Mr. Rybak's brother Andy as a top manager, could also have provided a warning sign. Yet the company actually had as its core a useful and successful product - bomb detection systems for airports - so it was easy to fool oneself. In fact, the detection product was acquired by another company and it still being sold today, six and a half years after the downfall. Again in retrospect, a strong-willed and aggressive CEO founder, was likely able to bend the board of directors to his unwise plans when the company was public. On top of that, the CEO liked to live high and well, with corporate offices in the big towers on Bay Street. And finally, in retrospect as well, a CEO who did not pay too much attention to "accounting details", as he said (see Bagnall article links below) when improprieties were uncovered by auditors.
Mr. Rybak did not lose his shirt however, as he now lives in a luxury condo in Monaco. And he did not lose his self-confidence or his talent for wreaking financial mayhem (or worse?), being subsequently one of the main protagonists in the even larger Langbar scandal that has garnered much attention over here in the UK. James Bagnall of the Ottawa Citizen wrote a couple of extended articles about the man and his exploits - in December 2005, December 2006. Is it an accident that the old IDS weblink points to a website about law enforcement?
The ancient Romans invented the appropriate expressions in Latin, MEA CULPA and CAVEAT EMPTOR. Every time I open my online account listing, I see that line with IDS and $0.00 market value beside the $xx,xxx book value to remind me.
Labels:
disasters,
Intelligent Detection Systems,
risk,
Rybak
Thursday 15 February 2007
Maybe It Isn't a China Bubble, but It Looks Like One
The Chinese stock market has accelerated to the heights over the last several years as this chart of the iShares Xinhua China25(FXI) from Yahoo shows.
Inevitably the talk has started that a new stock bubble is underway. A couple of examples articles: Tom Lydon at Seeking Alpha, Business Week's China's Bourses: Fasten Your Seatbelts. Reports that major companies which are components of the FXI Index are sporting P/E's over 40, not sustainable in the long run, add to the out-of-wack feeling. China's economic growth has been especially strong but challenges lie ahead on the pollution and resource fronts. Finally, and especially worrying are the comments that ordinary people on the street in China are talking about stocks and pouring their money into the market. It is all too reminiscent of the Internet bubble days when it seemed friends and neighbours all wanted to talk about Nortel and Cisco.
As a result, despite the admonitions of the "pros" and my own general philosophy to buy and hold for periods of years, I have sold an amount equal to my original investment in FXI, which still leaves a healthy chunk due to the meteoric rise of the past year. I may be wrong and FXI will continue to go gangbusters but caution becomes more important with age!
Update March 4 - Should have sold all of it in the first place; suffered a $6/share reduction in profits before I finally got out completely of FXI. Stories like this one at CTV just reinforce that I have done the right thing. Learning slowly still but at less cost thankfully.
As a result, despite the admonitions of the "pros" and my own general philosophy to buy and hold for periods of years, I have sold an amount equal to my original investment in FXI, which still leaves a healthy chunk due to the meteoric rise of the past year. I may be wrong and FXI will continue to go gangbusters but caution becomes more important with age!
Update March 4 - Should have sold all of it in the first place; suffered a $6/share reduction in profits before I finally got out completely of FXI. Stories like this one at CTV just reinforce that I have done the right thing. Learning slowly still but at less cost thankfully.
Friday 9 February 2007
Hate Bank Charges? If You Can't Beat 'em, Join 'em
If you are like me and find all those bank charges too high, then here's one way to get it all back - buy stock in the banks.
Look at this chart from Yahoo to see why this makes sense. Just taking two banks as an example, from mid 1995 to today, both Bank of Nova Scotia (BNS) and Royal Bank of Canada (RY) have risen amazingly. Historical data from Yahoo that includes dividends and adjusts for stock splits shows the price of BNS has climbed from $4.90 at the end of January 1995 to $50.76 at the end of January 2007. That's a 10 times return or 1000%, an annual compound rate of return of 21.5%. The regular dividend payments seem to hover around 3% (BNS is currently at 3.3% yield and RY at 2.9%). An investment of $3100 today in BNS would cover $100 in bank fees from the dividends alone.
Of course, there is never any assurance that the stellar past performance of the banks will continue forever. Enron put quite a dent in CIBC and some banks have failed entirely through bizarre antics of a very few people (Barings Bank comes to mind).
Who knows, Canadian banks might just prove out the warning "be careful of what you wish, it might come to pass" and be allowed by the government to go ahead with their desire to merge. Many years ago, when I did my MBA one of my projects was to examine the merger that created the National Bank. The idea was to combine two smaller banks, the Banque Provinciale and the Banque Canadienne Nationale, to create a player on the scale of the big five. Unfortunately, the merger took so much time and effort of management over the next several years that it stayed the same size while the big five continued to grow and it lost all the ground it initially gained. One of the main problems was merging computer systems, which had been announced in the press by top management as being straightforward because both BP and BCP used IBM systems. These people would probably describe playing the clarinet as easy since it only requires blowing in one end and running one's fingers up and down the holes. The acquiree's shareholders gained but the acquirer's lost on the deal.
In the meantime the banks look pretty good to me and I have a lot tied up in them, including BNS and RY. Anyone's thoughts on what else to look out for that could derail them in a significant way would be most welcome.
Labels:
Bank of Nova Scotia,
banks,
Royal Bank
Thursday 8 February 2007
Foreign Investments and Currency Risk
At one point in 2006, the US market was rising but my investments were declining in Canadian dollars! The US dollar was going down faster against the Canadian dollar than the US market was going up. One could easily end up skeptical about the wisdom of international diversification, which Efficient Market Canada does a fine job explaining in its article Building a Globally Efficient ETF Portfolio, updated in January for 2007.
Since the objective of international diversification is not to simultaneously bet on foreign currency markets, at least for me, what can be done to avoid or wash out exchange rate effects? One way to counterbalance currency effects would be to buy a specialised ETFs such as FXC - Canadian Dollar Currency Trust. Here's a Wall Street Journal article that tells all about it, and another at the Motley Fool, but the basic idea is to buy the FXC ETF so if the Canadian dollar rises, the FXC fund rises proportionally, offsetting the fall in the value of the actual US equity fund, such as IVV iShares S&P 500. If one holds a number of different US ETFs and equities, one could add up all their value and hold an equivalent amount in the FXC to be rid of currency shift effects. This is getting a bit complicated and requires doubling the overall amount invested - the total of IVV plus an equal amount of FXC - and it doesn't address the rest of world, so what else can be done?
A reasonable solution for US and international diversification to eliminate currency risk that I have found is to buy iShares Canada funds such as XSP and XIN, both traded on the TSX. Both are hedged to Canadian dollars, i.e. iShares does the currency trading to wash out the currency risk. XSP tracks the S&P 500 while XIN tracks the MSCI EAFE Index that includes 21 MSCI country indices of developed markets outside North America - Europe, Australasia and the Far East. Claymore Investments Inc. has more recently entered the market with a similar hedged ETF, the CLU (the FTSE RAFI US 1000 Index). Claymore also offers CBQ (tracking companies in Brazil, Russia, India and China), though this latter fund is hedged only to US dollars since it comprises equities traded in New York and it tracks companies it has selected using a proprietary method, not indices. Go here to get the Claymore explanations.
I do have holdings in XSP and IVV but not any (yet) of the other funds mentioned.
The fundamental reason for getting rid of currency risk is that one needs to have the profits of investments in the currency of the country where one spends the money. If one travels or spends or spends time in the US, then it makes sense to have US dollars so then one would NOT want to eliminate currency risk.
Since the objective of international diversification is not to simultaneously bet on foreign currency markets, at least for me, what can be done to avoid or wash out exchange rate effects? One way to counterbalance currency effects would be to buy a specialised ETFs such as FXC - Canadian Dollar Currency Trust. Here's a Wall Street Journal article that tells all about it, and another at the Motley Fool, but the basic idea is to buy the FXC ETF so if the Canadian dollar rises, the FXC fund rises proportionally, offsetting the fall in the value of the actual US equity fund, such as IVV iShares S&P 500. If one holds a number of different US ETFs and equities, one could add up all their value and hold an equivalent amount in the FXC to be rid of currency shift effects. This is getting a bit complicated and requires doubling the overall amount invested - the total of IVV plus an equal amount of FXC - and it doesn't address the rest of world, so what else can be done?
A reasonable solution for US and international diversification to eliminate currency risk that I have found is to buy iShares Canada funds such as XSP and XIN, both traded on the TSX. Both are hedged to Canadian dollars, i.e. iShares does the currency trading to wash out the currency risk. XSP tracks the S&P 500 while XIN tracks the MSCI EAFE Index that includes 21 MSCI country indices of developed markets outside North America - Europe, Australasia and the Far East. Claymore Investments Inc. has more recently entered the market with a similar hedged ETF, the CLU (the FTSE RAFI US 1000 Index). Claymore also offers CBQ (tracking companies in Brazil, Russia, India and China), though this latter fund is hedged only to US dollars since it comprises equities traded in New York and it tracks companies it has selected using a proprietary method, not indices. Go here to get the Claymore explanations.
I do have holdings in XSP and IVV but not any (yet) of the other funds mentioned.
The fundamental reason for getting rid of currency risk is that one needs to have the profits of investments in the currency of the country where one spends the money. If one travels or spends or spends time in the US, then it makes sense to have US dollars so then one would NOT want to eliminate currency risk.
Labels:
currency,
diversification,
ETF,
international,
risk
Wednesday 7 February 2007
Book Review: Secrets of the Millionaire Mind
Repeat every day out loud to yourself "I have a millionaire mind" and touch your head when saying that. That sums up the advice of this book. (It made me wonder whether it would work if I said instead "I have a Nobel laureate's mind".)
For the life of me I cannot figure out why this is a best seller. It follows the familiar pattern of "change-your-life" self-help books with much common sense advice that is repeated in so many other places. Principles like pay yourself first and rich people manage their money well will hardly shock or surprise. Eker's advice is not wrong or stupid, it does make sense, but maybe it's my age, I seem to have read this all before.
Those who would expect biographies of rich people and how they think will be disappointed. The only rich person whose thinking is examined, is Eker himself.
The "resources" at the end consist of five pages of further seminars offered by the author. The text is peppered with references and exhortations to those seminars. Several testimonials as to how the seminars have changed people's lives are included. At times the book reads like an infomercial (Eker is merely following his own advice that rich people aren't afraid of self-promotion.) The style is what may be described as heavy with exclamation marks, like so! The writing approach is to post quote-like sayings in centered bold print then to tell little stories to explain.
The annoyances and limitations aside, I did enjoy some of the content. My favorite quote from the book is "Money will only make you more of what you already are." Another passage that made me smile is where he interviews a financial planner seeking to sign Eker up as a client. He turns the tables and asks for the planner's current portfolio to measure the planner's abilities. Yes indeed, "if you"re so smart, why aren't you rich?" Wouldn't it be great if that were a mandatory disclosure for mutual fund managers?
Bottom line: it's a quick read at 192 big print pages, so if you have a quiet Sunday afternoon with nothing urgent to do, by all means go get it at the library.
For the life of me I cannot figure out why this is a best seller. It follows the familiar pattern of "change-your-life" self-help books with much common sense advice that is repeated in so many other places. Principles like pay yourself first and rich people manage their money well will hardly shock or surprise. Eker's advice is not wrong or stupid, it does make sense, but maybe it's my age, I seem to have read this all before.
Those who would expect biographies of rich people and how they think will be disappointed. The only rich person whose thinking is examined, is Eker himself.
The "resources" at the end consist of five pages of further seminars offered by the author. The text is peppered with references and exhortations to those seminars. Several testimonials as to how the seminars have changed people's lives are included. At times the book reads like an infomercial (Eker is merely following his own advice that rich people aren't afraid of self-promotion.) The style is what may be described as heavy with exclamation marks, like so! The writing approach is to post quote-like sayings in centered bold print then to tell little stories to explain.
The annoyances and limitations aside, I did enjoy some of the content. My favorite quote from the book is "Money will only make you more of what you already are." Another passage that made me smile is where he interviews a financial planner seeking to sign Eker up as a client. He turns the tables and asks for the planner's current portfolio to measure the planner's abilities. Yes indeed, "if you"re so smart, why aren't you rich?" Wouldn't it be great if that were a mandatory disclosure for mutual fund managers?
Bottom line: it's a quick read at 192 big print pages, so if you have a quiet Sunday afternoon with nothing urgent to do, by all means go get it at the library.
Labels:
book review,
Eker
Tuesday 6 February 2007
Mutual Funds vs ETFs
Many people have commented on the much higher Management Expense Ratios as being the worst disadvantage of mutual funds compared to ETFs. While high MERs are decidedly detrimental, to my mind the real killer is the other oft-noted fact that most mutual funds give poorer returns than the related market benchmark. So much for the touted "professional management" advantage supposedly provided by mutual funds. Simply by choosing an ETF, which mimics some benchmark or other, one can do better than most mutual funds (e.g. this paper or this extensive review on US funds).
On top of that, there are now more equity mutual funds than there are equities, so choosing the best one(s) requires more filtering of information than would the direct route of investing in equities. When choosing to invest savings in a mutual fund, one is in effect having to replace the assessment of a company with the evaluation of the people making the investment decisions, the mutual fund managers. By managers, I mean the people inside the fund management companies. They are ultimately the ones who make the purchase and sale decisions. Unfortunately, there is even less transparency and available information about fund managers than about companies, who are obliged to report results regularly. Like every other human endeavour, be it hockey, brain surgery or auto mechanics, some people are superb at it, some are abysmal and most are somewhere in between. How can one tell the "Warren Buffett" from the "bottom of the class"? Pick any fund website and about the only info on the people is the name and how many years of industry experience and degrees the manager has. There's nothing about that person's past performance or results. Maybe if they did publish such information it would be worth reconsidering. In the meantime, I have very little invested in mutual funds.
On top of that, there are now more equity mutual funds than there are equities, so choosing the best one(s) requires more filtering of information than would the direct route of investing in equities. When choosing to invest savings in a mutual fund, one is in effect having to replace the assessment of a company with the evaluation of the people making the investment decisions, the mutual fund managers. By managers, I mean the people inside the fund management companies. They are ultimately the ones who make the purchase and sale decisions. Unfortunately, there is even less transparency and available information about fund managers than about companies, who are obliged to report results regularly. Like every other human endeavour, be it hockey, brain surgery or auto mechanics, some people are superb at it, some are abysmal and most are somewhere in between. How can one tell the "Warren Buffett" from the "bottom of the class"? Pick any fund website and about the only info on the people is the name and how many years of industry experience and degrees the manager has. There's nothing about that person's past performance or results. Maybe if they did publish such information it would be worth reconsidering. In the meantime, I have very little invested in mutual funds.
Labels:
ETF,
mutual funds
Monday 5 February 2007
BMO Investorline Lowers Some Trading Fees
It's nice to read that discount BMO Investorline is lowering its equity trading fees to $9.95 per trade for all telephone or online automated trades as of March 31st on both Canadian and US exchanges. See http://www.bmoinvestorline.com/ProductsServices/5Star.html. That's a big drop from the existing $25 for market orders. Unfortunately, this applies only to what it calls Gold Star clients who have combined assets with BMO of $500k or more. Canada has for years lagged behind the US in low trading fees so maybe this is the start of a change that will extend to all clients. Anyone know if the other major discount brokers in Canada are following suit?
Labels:
BMO Investorline,
commission rates,
discount brokers
Friday 2 February 2007
Deemed Disposition and Probate
Some years ago when I had to perform the tasks of executor for my wife's will, I was caught in a very unusual unusual situation. Since the the tax rules specify that all of a deceased taxpayer's assets are deemed to be sold as of the date of death, capital gains are liable to be paid on that deemed disposition. That's exactly what happened with Nortel at the time, which only begun its slide by the time of death at the end of September 2000.
By the time the will was probated in December 2000, the stock price had dropped by close to 40%. The capital gains tax payable almost exceeded the value of the stock holding. By the time the estate was ready to be distributed some months later, it did by a good margin. The only way to avoid a huge tax hit was to avail myself of a provision that allows a spouse, and only a spouse, who is to inherit some or all of an estate, to receive his/her share at the original cost of the deceased taxpayer and to avoid deemed disposition of those specific assets. At least the executor, unless the will states otherwise, is at liberty to decide who will receive which specific assets.
This incident revealed to me some interesting characteristics of having a will probated. Financial institutions seemingly will generally (except for things like funeral expenses) refuse to accept instructions of the executor (e.g. liquidating assets) until the will is probated unless the amounts are quite small. This appears to be a matter of the financial institution showing proper care to avoid getting sued later by disgruntled inheritors. Same goes for the executor. There does not seem to be any law that requires a will to have received probate from a court before it can be carried out.
However, even when a will has been probated, if another later will is found and can be shown to be valid then the original probated will does not stand and the executor would have to start all over again. What does all the money paid for probate actually give one then? It can cost a lot of money ($5 per thousand on the first $50k of assets and $15 per thousand on the excess in Ontario). Certainly it doesn't happen very quickly - a matter of months at best.
Does the court check for existence of other wills - no! how could it in practical terms? Does the court even check the accuracy of assets listed in the estate - again, no, unless some lawyers out there can correct me ... some dishonest people might be tempted to understate the total assets, n'est-ce pas? The bottom line is that the probate fee is not a fee for a service, it is a tax on wealth. Why not a flat fee of $150 or some such amount that reflects the actual work involved by the court?
By the time the will was probated in December 2000, the stock price had dropped by close to 40%. The capital gains tax payable almost exceeded the value of the stock holding. By the time the estate was ready to be distributed some months later, it did by a good margin. The only way to avoid a huge tax hit was to avail myself of a provision that allows a spouse, and only a spouse, who is to inherit some or all of an estate, to receive his/her share at the original cost of the deceased taxpayer and to avoid deemed disposition of those specific assets. At least the executor, unless the will states otherwise, is at liberty to decide who will receive which specific assets.
This incident revealed to me some interesting characteristics of having a will probated. Financial institutions seemingly will generally (except for things like funeral expenses) refuse to accept instructions of the executor (e.g. liquidating assets) until the will is probated unless the amounts are quite small. This appears to be a matter of the financial institution showing proper care to avoid getting sued later by disgruntled inheritors. Same goes for the executor. There does not seem to be any law that requires a will to have received probate from a court before it can be carried out.
However, even when a will has been probated, if another later will is found and can be shown to be valid then the original probated will does not stand and the executor would have to start all over again. What does all the money paid for probate actually give one then? It can cost a lot of money ($5 per thousand on the first $50k of assets and $15 per thousand on the excess in Ontario). Certainly it doesn't happen very quickly - a matter of months at best.
Does the court check for existence of other wills - no! how could it in practical terms? Does the court even check the accuracy of assets listed in the estate - again, no, unless some lawyers out there can correct me ... some dishonest people might be tempted to understate the total assets, n'est-ce pas? The bottom line is that the probate fee is not a fee for a service, it is a tax on wealth. Why not a flat fee of $150 or some such amount that reflects the actual work involved by the court?
Labels:
capital gains,
deemed disposition,
Nortel,
probate,
taxes
Thursday 1 February 2007
Seven Deadly Sins of Investors - 5 Stars
This six page paper (The 7 Deadly Sins of Investors), written by Irish university business researchers Michael Dowling and Brian Lucey in a non-academic and very readable style, deals with the psychological mistakes that we individual investors are prone to make. And sure enough I recognized myself in there under the sin of Anger (aka non-diversification). As the authors point out, diversification means not just one's stocks and bonds, it should be taken very broadly to include employment, pension, a house etc. I can vouch from my experience working for Nortel in the good old John Roth days, it is a bad idea, as the authors say, to have pension investment in the company where one is employed (when I reach 65, I can claim a pension of around $2.17 per month from my four and a half years at the company - ouch!). In March 2000, the very peak of the dotcom boom, I said to my wife something like "if I sold all my (tech stocks) now, it would be enough to retire and live on reasonably well" and she replied "why don't you?" Yes indeed, why didn't I?
Here's a little snip that gives a flavour of the paper:
Though I've read this kind of advice before, it is handy to be reminded about it since the toughest thing to do is alter one's own behaviour! I can't show it to my wife though because it says women are better investors than men, ahem.
There are lots of references to the real academic research that prove the points for anyone who wants to get to the original source.
Here's a little snip that gives a flavour of the paper:
The investors who trade too much, who don’t diversify, and who follow the crowd, are doomed to repeat the mistakes of earlier investors. Good investors don’t necessarily have to do much to be successful.
Though I've read this kind of advice before, it is handy to be reminded about it since the toughest thing to do is alter one's own behaviour! I can't show it to my wife though because it says women are better investors than men, ahem.
There are lots of references to the real academic research that prove the points for anyone who wants to get to the original source.
Labels:
investment psychology
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