Wednesday, 2 May 2007
Canadian Tour of Personal Finance Blogs
A quick note to say that I will be taking part in the next round of the Canadian Tour of Personal Finance Blogs started by Monty Loree at Canadian Money Advisor. This time the host reviewer is The Money Diva. The reason I'm participating is the same reason I read other blogs and post links to them on my website - no one has all the answers or can do all the research and the different perspectives and interests add to everyone's knowledge. Look for the reviews at The Money Diva on Monday, May 7th.
Tuesday, 1 May 2007
UK Portfolio - Part 2 - Principles & Constraints
Before taking any actions and making any decisions regarding the revamping of the portfolio of my UK friend, it is important to spell out the principles and constraints that will drive the portfolio and its management for the indefinite future. So here they are:
KISS (Keep It Simple Stupid) - The over-riding organizing principle is that the portfolio and its on-going management should be as simple as possible. In the immortal words of Albert Einstein who seemed to have mastered KISS with his famous formula, "Everything should be made as simple as possible, but not simpler." Simplicity is in keeping with the desire of the person owning the portfolio to not spend large amounts of time on managing it. The principle will also enable the owner to understand and to track the portfolio and to make the changes without intervention by anyone else.
Consistent with Financial Theory - The portfolio should accept and adhere to the results of the massive amount of financial research, i.e. that is scientific and generally accepted, conducted in the last 80 years. Perhaps this is too obvious to state but it dictates that market timing be avoided and that diversification be pursued. A standard finance textbook like Bodie et al, Investments, is a good source for seeing what is generally-accepted.
Passive Investing with Index ETFs or Funds - The portfolio will therefore take a passive investing approach, rather than active management, and this includes avoiding ETFs or funds that have active managers. Financial theory says that one cannot and should not try to beat the market so buying the market in the form of funds that track the market is the way to go.
Low Number of Holdings - Too many different holdings will add to confusion and will make it more cumbersome and difficult to do the required re-balancing, especially across the four account types that will need to be used for tax reasons. On the equity side, that arbitrarily will mean no more than ten holdings. This factor is less important than the diversification requirement, which is at the heart of the portfolio approach. Thus, if effective diversification had required more than ten holdings, the number would have to be bumped up. Fortunately, this is not the case. There was a certain iterative process I found in doing this whole exercise where the initial objectives and principles needed to be reviewed and somewhat revised when later steps showed something didn't work quite right and slightly revising an earlier decision made it all fit better.
Implementable / Investable - A good example of this iterative revision happened when I tried to later on find the actual ETFs/funds to purchase for the portfolio and discovered that the UK doesn't have anywhere near the depth and breadth of choices in ETFs or low-cost funds that a Canadian can buy in the US market. UK discount brokers generally don't offer the ability to buy such US-traded funds, with the result that some particular holdings like international value and small cap ETFs are simply not readily available to UK investors. I eventually did come across TD Waterhouse UK, which does offer an account that enables full, direct access to US exchanges (NYSE, Amex, NASDAQ) but by then implementation had already started with another brokerage and it would have been a lot of bother to back and start over. It has been said many times that an imperfect plan properly executed now is better than a perfect plan next month.
Long Time Horizon - The investment assumption for the most part is an investment horizon of many years, twenty or more. That's because the person has a salary more than adequate for today's needs, and a pension that will be sufficient to live off without this portfolio's profits. It will be possible to be patient to ride out the inevitable downs of multi-year equity market dips. As Moshe Milevsky notes in his books and articles, time in retirement can easily reach 25-35 years so that's a good investment planning horizon for this person. The reference to the "for the most part" is the possibility that there will be a desire to help out a child financially, for example, to assist making a housing purchase in the very pricey UK market. That explains why in the preceding Diagnosis post, a fairly high allocation in liquid cash was deemed ok.
Tax Minimization - This is a goes-without-saying objective. A guaranteed tax saving is like an extra risk-free return. Not paying 20% tax on interest-bearing investments increases the after-tax net return by that amount. Putting money into tax-exempt accounts/plans like an Individual Savings Account (see here for how they work) or holdings, like tax-exempt bonds (see National Savings and Investments) within the overall portfolio plan, will be pursued in the revamping.
Cost Minimization - Perhaps not as obvious as minimizing taxes, but paying high annual fees on the 1.5% on the existing funds is to be avoided if possible. A target would be 0.5% as desirable and under 1% the maximum. It has been shown that, on average, higher cost funds produce lower returns for the investor (though I cannot find the link as a reference at the moment). The same goes for brokerage account management and trading fees, though the impact is less (unless one would go to a full service broker who charge a percentage of the assets held). A simple portfolio that can be self-managed on-line lends itself well to lower cost discount brokerages.
Annual Re-balancing - The portfolio will be re-balanced once a year in mid-April. The asset allocations will be re-stored by selling and/or buying the same ETFs or funds already in the portfolio. If there is only a small deviation of the order of less than 1% from the total portfolio target a holding will be left alone. The annual re-balancing frequency has been chosen because research such as here at the Journal of Financial Planning and here at William Bernstein's website indicates it gives close to the best investment results vs risks. Once a year, after tax year-end of April 5th here in the UK, is a convenient time to move investments or put new money into the tax-exempt ISAs. Finally, it becomes a file-and-forget item that makes it easy for this well-organized person to schedule into the agenda.
Diversification - The single most critical element is that the portfolio will seek diversification benefits of higher returns and lower volatility. This is accomplished by selecting holdings that are either uncorrelated or negatively correlated with each other (see explanations such as IndexInvestor.com, and William Bernstein, linked above plus books like that of Richard Ferri which I previously reviewed). This apparently is not an exact or perfect science since such correlations vary considerably from year to year and for many years diverge from long-term averages but the benefit is very considerable over long time periods when such variations even out (thus the importance above of adopting a long planning horizon). That means acquiring holdings among equities in real estate, in small cap companies, in value (i.e. measures of "cheap stock price" according to accounting stats) companies and in international markets.
KISS (Keep It Simple Stupid) - The over-riding organizing principle is that the portfolio and its on-going management should be as simple as possible. In the immortal words of Albert Einstein who seemed to have mastered KISS with his famous formula, "Everything should be made as simple as possible, but not simpler." Simplicity is in keeping with the desire of the person owning the portfolio to not spend large amounts of time on managing it. The principle will also enable the owner to understand and to track the portfolio and to make the changes without intervention by anyone else.
Consistent with Financial Theory - The portfolio should accept and adhere to the results of the massive amount of financial research, i.e. that is scientific and generally accepted, conducted in the last 80 years. Perhaps this is too obvious to state but it dictates that market timing be avoided and that diversification be pursued. A standard finance textbook like Bodie et al, Investments, is a good source for seeing what is generally-accepted.
Passive Investing with Index ETFs or Funds - The portfolio will therefore take a passive investing approach, rather than active management, and this includes avoiding ETFs or funds that have active managers. Financial theory says that one cannot and should not try to beat the market so buying the market in the form of funds that track the market is the way to go.
Low Number of Holdings - Too many different holdings will add to confusion and will make it more cumbersome and difficult to do the required re-balancing, especially across the four account types that will need to be used for tax reasons. On the equity side, that arbitrarily will mean no more than ten holdings. This factor is less important than the diversification requirement, which is at the heart of the portfolio approach. Thus, if effective diversification had required more than ten holdings, the number would have to be bumped up. Fortunately, this is not the case. There was a certain iterative process I found in doing this whole exercise where the initial objectives and principles needed to be reviewed and somewhat revised when later steps showed something didn't work quite right and slightly revising an earlier decision made it all fit better.
Implementable / Investable - A good example of this iterative revision happened when I tried to later on find the actual ETFs/funds to purchase for the portfolio and discovered that the UK doesn't have anywhere near the depth and breadth of choices in ETFs or low-cost funds that a Canadian can buy in the US market. UK discount brokers generally don't offer the ability to buy such US-traded funds, with the result that some particular holdings like international value and small cap ETFs are simply not readily available to UK investors. I eventually did come across TD Waterhouse UK, which does offer an account that enables full, direct access to US exchanges (NYSE, Amex, NASDAQ) but by then implementation had already started with another brokerage and it would have been a lot of bother to back and start over. It has been said many times that an imperfect plan properly executed now is better than a perfect plan next month.
Long Time Horizon - The investment assumption for the most part is an investment horizon of many years, twenty or more. That's because the person has a salary more than adequate for today's needs, and a pension that will be sufficient to live off without this portfolio's profits. It will be possible to be patient to ride out the inevitable downs of multi-year equity market dips. As Moshe Milevsky notes in his books and articles, time in retirement can easily reach 25-35 years so that's a good investment planning horizon for this person. The reference to the "for the most part" is the possibility that there will be a desire to help out a child financially, for example, to assist making a housing purchase in the very pricey UK market. That explains why in the preceding Diagnosis post, a fairly high allocation in liquid cash was deemed ok.
Tax Minimization - This is a goes-without-saying objective. A guaranteed tax saving is like an extra risk-free return. Not paying 20% tax on interest-bearing investments increases the after-tax net return by that amount. Putting money into tax-exempt accounts/plans like an Individual Savings Account (see here for how they work) or holdings, like tax-exempt bonds (see National Savings and Investments) within the overall portfolio plan, will be pursued in the revamping.
Cost Minimization - Perhaps not as obvious as minimizing taxes, but paying high annual fees on the 1.5% on the existing funds is to be avoided if possible. A target would be 0.5% as desirable and under 1% the maximum. It has been shown that, on average, higher cost funds produce lower returns for the investor (though I cannot find the link as a reference at the moment). The same goes for brokerage account management and trading fees, though the impact is less (unless one would go to a full service broker who charge a percentage of the assets held). A simple portfolio that can be self-managed on-line lends itself well to lower cost discount brokerages.
Annual Re-balancing - The portfolio will be re-balanced once a year in mid-April. The asset allocations will be re-stored by selling and/or buying the same ETFs or funds already in the portfolio. If there is only a small deviation of the order of less than 1% from the total portfolio target a holding will be left alone. The annual re-balancing frequency has been chosen because research such as here at the Journal of Financial Planning and here at William Bernstein's website indicates it gives close to the best investment results vs risks. Once a year, after tax year-end of April 5th here in the UK, is a convenient time to move investments or put new money into the tax-exempt ISAs. Finally, it becomes a file-and-forget item that makes it easy for this well-organized person to schedule into the agenda.
Diversification - The single most critical element is that the portfolio will seek diversification benefits of higher returns and lower volatility. This is accomplished by selecting holdings that are either uncorrelated or negatively correlated with each other (see explanations such as IndexInvestor.com, and William Bernstein, linked above plus books like that of Richard Ferri which I previously reviewed). This apparently is not an exact or perfect science since such correlations vary considerably from year to year and for many years diverge from long-term averages but the benefit is very considerable over long time periods when such variations even out (thus the importance above of adopting a long planning horizon). That means acquiring holdings among equities in real estate, in small cap companies, in value (i.e. measures of "cheap stock price" according to accounting stats) companies and in international markets.
Monday, 30 April 2007
UK Portfolio Revamp - Part 1 - Diagnosis
Recently I have spent considerable time helping a UK friend restructure an investment portfolio and thought it might be of interest to talk about how I've gone about it. Maybe someone out there would have good ideas on what else can be done.The spreadsheet image displays the portfolio as it was about a month and a half ago, the "before" shot. This was a portfolio that had evolved by happenstance - an advisor or someone from the bank would recommend an investment, money would be put in and then forgotten, the statements being merely filed away as they arrived in the mail. The person has had, and continues to have little interest in managing the investments ... a factor that will play into the re-design as a strict KISS principle. Anyhow, my observations of the portfolio were as follows:
Equity vs Fixed Income vs Cash - the 56% in equities overall is not unreasonable, well within the range of 25 to 75% equity allocation that I think, along with many financial luminaries, is reasonable, The person is very cautious and a lower equity allocation makes sense for now. Maybe down the road that could change but there are more pressing things to fix. The life insurance components, which I have called "savings", guarantee a certain return when they mature and function more or less like fixed income. The percentage in "cash" is too much above foreseeable needs and more than a six month cushion even. The person's employment benefits and salary provide a lot of protection for unforeseeables and things like health emergencies. In the larger scheme, later the person will also benefit from an inflation-indexed pension, providing a constant guaranteed cash flow through all of eventual retirement. That means equity volatility can be endured without actual reduction in lifestyle.
Taxes - Taxes are a considerable problem area. Way too much is being paid. The bank cash deposits are generating something like 2.5-3.0% interest before tax and the 20% tax means the net return is below inflation, meaning there is a net on-going loss in purchasing power. There has been no investment in tax-exempt accounts like ISAs (similar to Canadian RRSPs, except that the withdrawals are never taxed and the annual limits are lost if not used each year). The same un-necessary tax burden applies on almost all the equity investments - nothing has been put into equity ISAs except the PEP accounts, a precursor to ISAs that haven't been available for years.
Fees - The equity investments are all in the UK version of mutual funds, called OEICs, and the annual management fess of 1.5% are a drain on the returns. UK fund managers are no less immune to the oft-observed under-performance of the majority of actively managed funds than those in Canada or the USA. It is amusing to note that the retailer Marks and Spencer offers funds, which would be like The Bay doing so in Canada! Hey, why not Mcdonalds too!
Diversification - Despite their very different sounding names, all these funds hold UK equities and if one looks at their holdings, the same large company names appear over and over - HSBC, Royal Dutch Shell, Royal Bank of Scotland etc. Only the proportions seem to differ from fund to fund. In other words, there isn't any real diversification, they might as well be one holding. There is nothing international, there are no small company holdings, there is no real estate.
So the table is set for the next phase. asset allocation within the broad groupings. Stay tuned.
Friday, 27 April 2007
The Investment Angle of Children
A comment by Steve on my previous post Key Decisions that Affect Future Wealth to the effect that I had missed the major one of children set me thinking and investigating. Now, I have not worked out the Net Present Value of a child but here are some thoughts for everyone's fun.
There is no doubt that it costs a lot in dollars - about $167,000 in 2004 - to raise a child as this seemingly serious attempt to quantify presents. One could quibble about whether a child has truly been raised at 18 years old ;-) - e.g. what about post-secondary education, which I know from experience costs the proverbial arm and leg. Macleans magazine gives a rough estimate of $18,800 per year. The biggest cost of all is the time, worry and effort that the average parent devotes to raising children. Connected to that is the opportunity cost of not doing other things - maybe so many people wouldn't get sucked into poor mutual fund investing (though a poor investment is better than no investment at all) if they had the time and energy to devote to minimal financial management.
The revenue / income side is a bit thinner and less tangible. It used to be the case that children, until they left home, would bring their pay to their parents, but that stopped before my time in Canada (apparently it stopped only more recently in Scotland as my wife for a short while handed her pay packet to her mom after she started her full time job!).
Perhaps one could consider children as a kind of insurance policy for old age. The kids come and help physically when we get too infirm or sick, avoiding having to pay someone to do jobs like household tasks, or even financial management.
But more than that by far is the real investment return of children - the satisfaction and pleasure of seeing them grow and succeed is worth huge sums and far exceeds all the costs! I think of it this way - when I invest in stocks and bonds, the payoff is down the road when I get to consume the profits later, like going on holidays (Rome was great in February), drinking nice wines (looking forward to my first taste of Cloudy Bay sauvignon blanc) and so on. It's the same with children, they are a pleasure in themselves. There's a kind of compounding interest phenomenon when the grandchildren come along to increase the fun.
(Oh, and referring back to the other post, marriage for me brings similar rewards!)
Update June 3 ...
Just finished reading and reviewing Peter Bernstein's Capital Ideas book and discovered therein a pertinent reference from no less an authority than Aristotle himself. The Greek word for earnings from interest is apparently "tokos", which literally means offspring. Bernstein cites Aristotle, ",,, interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent." I'm glad to learn that I'm on the same page as Aristotle :-)
There is no doubt that it costs a lot in dollars - about $167,000 in 2004 - to raise a child as this seemingly serious attempt to quantify presents. One could quibble about whether a child has truly been raised at 18 years old ;-) - e.g. what about post-secondary education, which I know from experience costs the proverbial arm and leg. Macleans magazine gives a rough estimate of $18,800 per year. The biggest cost of all is the time, worry and effort that the average parent devotes to raising children. Connected to that is the opportunity cost of not doing other things - maybe so many people wouldn't get sucked into poor mutual fund investing (though a poor investment is better than no investment at all) if they had the time and energy to devote to minimal financial management.
The revenue / income side is a bit thinner and less tangible. It used to be the case that children, until they left home, would bring their pay to their parents, but that stopped before my time in Canada (apparently it stopped only more recently in Scotland as my wife for a short while handed her pay packet to her mom after she started her full time job!).
Perhaps one could consider children as a kind of insurance policy for old age. The kids come and help physically when we get too infirm or sick, avoiding having to pay someone to do jobs like household tasks, or even financial management.
But more than that by far is the real investment return of children - the satisfaction and pleasure of seeing them grow and succeed is worth huge sums and far exceeds all the costs! I think of it this way - when I invest in stocks and bonds, the payoff is down the road when I get to consume the profits later, like going on holidays (Rome was great in February), drinking nice wines (looking forward to my first taste of Cloudy Bay sauvignon blanc) and so on. It's the same with children, they are a pleasure in themselves. There's a kind of compounding interest phenomenon when the grandchildren come along to increase the fun.
(Oh, and referring back to the other post, marriage for me brings similar rewards!)
Update June 3 ...
Just finished reading and reviewing Peter Bernstein's Capital Ideas book and discovered therein a pertinent reference from no less an authority than Aristotle himself. The Greek word for earnings from interest is apparently "tokos", which literally means offspring. Bernstein cites Aristotle, ",,, interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent." I'm glad to learn that I'm on the same page as Aristotle :-)
Thursday, 26 April 2007
First Uranium's Convertible Debentures
A friend sent along some questions regarding the recent announcement by First Uranium Corp (TSX:FIU) of its debentures. Thought I would post my comments ....
The Press Release
"First Uranium" or "the Company") today announced the pricing of its private placement of 4.25% senior unsecured convertible debentures (the "Debentures") due June 30, 2012 and an increase in the aggregate principal amount of Debentures to be sold to CDN$150 million. The sale of the Debentures is expected to close on May 3, 2007. The Debentures will bear interest at a rate of 4.25% per annum payable semi-annually and will be convertible into common shares of the Company at CDN$16.42 per share representing a conversion premium of approximately 37.5% to the closing price of the shares on the Toronto Stock Exchange (the "TSX") on April 18, 2007."
My Friend's Questions
I am not familiar at all with Debentures and have no intention of buying any - I wouldn't know how to even if I wanted to - but wonder if I understand correctly that those who buy these debentures will be entitled to buy FIU stocks at $16.42 per share on June 30, 2012 and thus make an investment with a guaranteed return of 4.25% per annum plus the possibility of capital gain of the FIU share price in June 2012 less $16.42? Or are the debentures convertible any time? Or have I misunderstood completely?
My Comments
First, I'm glad that my friend doesn't intend to buy any, even if he could. This is all highly risky and speculative. A quick look at the company's website shows that it is a brand new company founded in 2006 whose shares first began to trade in the last six months. FIU is a company that is developing gold and uranium mines in South Africa. It has no production yet and won't till 2008, if it succeeds in its plans. The stock chart shows how volatile the stock has been in its short history; though it has been all upwards, that could change in a flash if bad news comes out of the company.
Now for the debentures themselves. Debentures are a form of debt issued by the company, with no collateral protection against assets of the company in case there would be bankruptcy or insolvency. We ordinary mortals can buy them and other forms of bonds in the fixed income area of our online brokerage accounts. Given that FIU is a new venture, if it spends all the money it has raised from the start-up equity sale in December and from the debentures on development of the mines but is unsuccessful, how likely is it that there will be any left to reimburse the holders of the debentures their capital, let alone pay the promised interest?
FIU is so new that Dominion Bond Rating Service and Standard and Poors, which rate the riskiness of company debt, do not even have FIU listed. Given the start-up nature of FIU, the riskiness of its debentures would likely be off the end of the scale. Yet, the 4.25% rate
of interest offered is comparable to that of high-grade companies, i.e. it is less than generous.
The date June 30, 2012 is when the debenture face value of $1000 of each debenture bond will be repaid to the debenture holders, if they have not converted into common stock of FIU in the meantime.
Convertible means that at the request/option of the debenture holder, FIU will take back the debt and issue new common stock in its place. The $1000 face value of each bond will be divided by the $16.42 conversion price to determine how many shares will be issued (1000/16.42 = 60.9013) The press release doesn't specify but we assume that the simplest conversion privilege is in effect - that the debenture holders can convert their debt into common stock of FIU anytime they please between now and June 30, 2012. With the stock price of FIU currently trading around $12 per share, a debenture holder will not want to convert. The market price of the stock will have to go above $16.42 to make it worthwhile. In effect a convertible debenture is a combination of a debt/bond and a call option on the stock. The more the market stock price is below the conversion price, the more the value of the debenture is based on its bond value, which is the discounted cash flow of the interest payments and the $1000 face value returned at maturity. When the stock price approaches or exceeds the conversion price of $16.42, the price of the debenture will move with the market stock price.
The final point is that this is immaterial to my friend, to me and to other members of the investment public since it was a private placement, meaning that the debentures were sold on FIU's behalf by RBC and other members of the sellers group, called the underwriters, directly to institutional investors like pension funds (though I doubt they would be buying such speculative securities). Some of the debt may be re-sold by these initial buyers and show up in the secondary market and be available through our brokers at which point we could buy them. Not by me, though!!
Tuesday, 24 April 2007
Book Review: Money Logic by Moshe Milevsky
York University finance professor Moshe Milevsky (with co-author Michael Posner) takes us through a series of investment issues in this very worthwhile book, valuable both for its impeccable logic debunking certain common misconceptions and for its informal, readable, common sense approach to providing the explanations. The focus is on principles not on assessment of specific products from individual companies. That is not to say the analysis he presents to the reader is general and not actionable. On the contrary, Milevsky gives us the tools to make our own decision about the topics he covers.
The list of topics includes:
- assessing mutual fund performance
- dollar cost averaging as an investment approach
- the value of segregated mutual funds
- the whys of international diversification
- index-linked GICs
- how to do-it-yourself to get the same benefit as offered by index-linked GICs
- the mortgage paydown vs RRSP invest decision
- asset allocation in retirement - how much equity vs fixed income and why
- after the RRSP years - RRIFs vs annuities
- general discussion of risk or uncertainty in making future decisions and how to factor it in
Though not revised since its publication in 1999, there is little feeling of it being dated. In some cases, like the admonition to us to diversify internationally, it has become more relevant, since the federal government has since removed the RRSP foreign content limit, advocated by Milevsky in the book.
Many people could benefit from reading this book and understanding and accepting some basic conclusions that still rage on as debates in the blogosphere. For instance, dollar cost averaging as an investment approach is stupid because it lowers investment returns, though regular automatic savings that are invested make a lot of sense because most people don't save. In other words, if you have a lump sum available from a lottery win, don't wait to invest it for reasons of dollar cost averaging. If you want to see why, buy Milevsky's book or borrow it from the library. Another topic of this sort is the RRSP vs mortgage payment debate (see here at MillionDollarJourney for example). Hint: There is only one factor to consider - anyone want to guess what it is? ;-)
In short, get the book and read it, it's only 200 big print pages and won't put you to sleep. Five out of five stars.
Buy this book at
chapters.indigo.ca
Monday, 23 April 2007
Investing in Canadian vs International Equities
Just came across a fascinating article on the CTV website titled "The identity crisis that will change the TSX" that was published in Saturday's Globe and Mail. Midway through it is a key phrase - "the Toronto Stock Exchange is becoming a market of smaller companies clustered in a narrow range of industries". The narrow range works out to financial, energy and mining.
The article is another good reminder about the need for Canadian investors, me included, to reduce equity holdings in the TSX to a minor portion - 10% or less - of the equity portfolio.
One of the benefits of moving to Scotland is that the distance adds perspective. It is easier to see how foreigners view Canada and to see Canada in its true place in the world. With respect to investment, Canada is a minor player, valuable primarily as an additional diversification element through resources.
The article also mentions the small cap nature of most of the TSX, so it can also play a small cap role in a portfolio (as we all know, small caps over long holding periods like twenty years, have been shown to give higher returns and to have weak correlation with the overall market, which in turn offers diversification benefit). Martin Gale over at Efficient Market Canada has an excellent article showing how the actual world equity market proportions work out - Canada is just over 3% of the total - and he uses this to show how a truly global portfolio would be structured, even to the names of the funds to buy. The reassurance of investing in what one knows about - domestic companies - is a great hazard as a result of the extra risk through inadequate diversification. (It's the same here in the UK. I'm in the midst of helping a friend do a portfolio makeover and that portfolio was 100% in UK equities yikes! ... through a raft of different mutual funds yikes! ... more on that in a future post).
Since I was due to do my semi-annual portfolio re-balancing in May, I will be doing some fairly drastic re-allocations along these lines, about which I will be posting down the road.
In my poking around thegoodwebguide.co.uk review of UK online brokerages, I came across TD Waterhouse, the UK version. It offers what seems to be a wonderful account for those interested in international investing and diversification. Through one account, it is possible to trade directly on 15 different exchanges around the world, including Canada, the USA, the UK, various other European exchanges, Australia, Hong Kong and Singapore. In addition, the holdings can be in four different currencies - Canadian and US dollars, sterling and euros. The trade costs are not the lowest at £12.50 for online trades (around CDN$ 30) but that's a lot better than the $100-200 BMO Investorline had told me a few years ago that it would cost to buy UK securities. Unfortunately the account is only available to UK residents and it doesn't look like TD Waterhouse Canada offers a similar one but it sure looks to me like it would be a smart thing to offer.
The article is another good reminder about the need for Canadian investors, me included, to reduce equity holdings in the TSX to a minor portion - 10% or less - of the equity portfolio.
One of the benefits of moving to Scotland is that the distance adds perspective. It is easier to see how foreigners view Canada and to see Canada in its true place in the world. With respect to investment, Canada is a minor player, valuable primarily as an additional diversification element through resources.
The article also mentions the small cap nature of most of the TSX, so it can also play a small cap role in a portfolio (as we all know, small caps over long holding periods like twenty years, have been shown to give higher returns and to have weak correlation with the overall market, which in turn offers diversification benefit). Martin Gale over at Efficient Market Canada has an excellent article showing how the actual world equity market proportions work out - Canada is just over 3% of the total - and he uses this to show how a truly global portfolio would be structured, even to the names of the funds to buy. The reassurance of investing in what one knows about - domestic companies - is a great hazard as a result of the extra risk through inadequate diversification. (It's the same here in the UK. I'm in the midst of helping a friend do a portfolio makeover and that portfolio was 100% in UK equities yikes! ... through a raft of different mutual funds yikes! ... more on that in a future post).
Since I was due to do my semi-annual portfolio re-balancing in May, I will be doing some fairly drastic re-allocations along these lines, about which I will be posting down the road.
In my poking around thegoodwebguide.co.uk review of UK online brokerages, I came across TD Waterhouse, the UK version. It offers what seems to be a wonderful account for those interested in international investing and diversification. Through one account, it is possible to trade directly on 15 different exchanges around the world, including Canada, the USA, the UK, various other European exchanges, Australia, Hong Kong and Singapore. In addition, the holdings can be in four different currencies - Canadian and US dollars, sterling and euros. The trade costs are not the lowest at £12.50 for online trades (around CDN$ 30) but that's a lot better than the $100-200 BMO Investorline had told me a few years ago that it would cost to buy UK securities. Unfortunately the account is only available to UK residents and it doesn't look like TD Waterhouse Canada offers a similar one but it sure looks to me like it would be a smart thing to offer.
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