Archive for September, 2009

Ontario versus the Mutual Fund Industry

September 21, 2009


When Ontario announced that it is harmonizing its sales taxes, the mutual fund industry went on a publicity drive shedding crocodile tears over how the HST is going to cost investors. I thought the chutzpah of an industry known for its sky-high fees complaining about investment expenses to be breathtaking (See post: Harmonization and mutual funds). Since then British Columbia has announced plans to harmonize its sales taxes as well and mutual funds are once again going in to bat for the plight of the retail investor. But the Ontario Government is not willing to tolerate criticism from the industry anymore. The Globe and Mail reported (See: Ontario fires back at mutual fund industry) that Government “has threatened Canada’s mutual fund industry with a PR offensive against management fees charged to investors, unless fund executives mute their objections to proposed sales tax changes.”

It is sad to see our elected representatives stoop to the level of blackmail — not out of any principle that a lot of products sold by the financial services industry impose a terrible cost on the savings of Canadians but simply to avoid the inconvenience of tough questions when Queens Park extracts its pound of flesh. Personally, I would like to see that PR offensive. An increased awareness that costs matter in investing can only help.

Nine Lessons Relearned from the Financial Meltdown

September 20, 2009


Plus ça change, plus c’est la même chose.

Exactly, one year ago Lehman Brothers collapsed, triggering a worldwide financial meltdown that threw millions out of work and devastated the retirement savings of many more millions. One year later, the economy and the stock market have recovered from the near-death experience, though not fully just yet. While some aspects of the financial crisis were surprising, many of the lessons of are timeless and shouldn’t be surprising at all:

  1. Live within your means. If there is a golden rule in personal finance this is it — spend less than you earn. Unfortunately, many had forgotten this basic rule, lulled into complacency by sunny skies, easy credit and a distant memory of the previous recession. Our savings rate was negative and many were unprepared to handle tough economic conditions. It doesn’t seem that this lesson has still sunk in — a depressing recent report suggested that Canadians have trouble establishing a savings habit.
  2. Keep an emergency fund. For me, this is the most important lesson of the financial crisis. I had believed earlier that a line of credit can serve as an emergency fund but not anymore. Though it never actually came to that, this crisis has amply demonstrated that a line of credit could be cut back or even become unavailable in a serious financial crisis — precisely when we may need a credit line the most. Now, I think a stash of cash that will cover three to six months of expenses is absolutely essential, despite the low returns and tax inefficiency of cash holdings.
  3. Use leverage responsibly. Back in 2007, leverage was very fashionable. Credit was cheap and plentiful and the TSX had returned an average of more than 20% for four years and for many, it seemed a no-brainer to borrow at a net of 3% and earn double-digit returns in the stock market. The stock market crash has exposed the risks in such a strategy — it is hard enough watching your own savings evaporate; it must be excruciating to think that you have to make up the difference to a lender. Leverage is unavoidable in certain cases such as buying a home or getting an education but still it must be approached with caution.
  4. A home is not an investment portfolio. With home prices trending upward year after year, a lot of investors fell into the trap of thinking of their home as an investment that could somehow be used to fund a retirement. The collapse of home prices in the United States is once again a reminder that homes are not immune to price corrections and it is best to think of a home as simply a place to live and raise a family — any price appreciation is simply a bonus.
  5. Stock markets can go down in a hurry. Benjamin Graham wrote in The Intelligent Investor: “In any case the investor may as well resign himself in advance to the probability rather than the mere possibility that most of his holdings will advance, say, 50% or more from their low point and decline the equivalent one-third or more from their high point at various periods in the next five years.” Somehow, investors are surprised when stocks do just that.
  6. Bonds have an important place in a portfolio. As unsexy as bonds are in bull markets, they really shine when stocks drive off a cliff. Firstly, bonds cushion the fall of stocks in a portfolio. Second, they enable an investor to take advantage of low stock prices through rebalancing. Note that bonds here refer to Government bonds, not corporate bonds, which historically have a high correlation with stocks. In the stock market panic of 2008, corporate bonds offered no protection and dropped just like stocks.
  7. Asset allocation still works. The widespread reports on the death of asset allocation are vastly exaggerated. It is true that stocks fell in lock step around the world. However, bonds, as noted earlier, held up their value and cushioned the fall in stock prices. That is exactly how we expect asset allocation to work — reduce the risk of a portfolio by adding asset classes that don’t move in sync together.
  8. Market timing still doesn’t work. The S&P 500 opened at 1,250 on that fateful morning on September 15, 2008. It closed at 1,049 yesterday for a loss of 16%. Add in dividend payments and you are probably looking at a modest loss. It didn’t always look that way. At one point, stocks would have been down by 47% and the market timers came out of the woodwork claiming that investors could have avoided the entire mess by following their timing model. The critical question though is: how many got back into stocks to take advantage of this rally?
  9. Do not load up on company stock. It is like watching the same horror flick over and over again. Every time a company fails, you read press reports of employees who have lost their job as well as their life savings. It happened with Bear Stearns; it happened with Lehman Brothers and probably every other company that filed for bankruptcy in the past year. We already depend on our employer for a paycheck; it doesn’t make much sense to compound the risk by investing our savings in our employer as well.

What lesson did you learn (or relearn) during the past year?

This and That: New Rules of Personal Finance and more…

September 17, 2009

  1. As we slowly limp back from the precipice of an economic disaster, the Wall Street Journal asked its columnists to write about how the rules of personal finance have changed over the last year. It seems to me that the rules haven’t changed at all — it is just that people forgot to follow them and the crisis simply exposed the perils of straying from the straight and narrow path.
  2. Questrade is trying to be innovative and responsive to the demands of the small investor. Some time back, they addressed a long-time grievance of DIY investors — why should discount brokers collect trailer fees for providing no investment advice whatsoever? Now, the fund industry is starting to fight back: Sprott Funds is blocking trailer fee rebates to Questrade clients.
  3. Globe and Mail reporter Sarah Boesveld is writing a column on sharing financial advice or information with friends and how it can help and harm. She is hoping to interview a few people on this topic. If you are interested, her contact information is available here.
  4. Million Dollar Journey shared six lessons learned from watching Dragon’s Den and Shark Tank. I have an additional one: Kevin O’Leary can often be a total jerk even though his own record as a capitalist is, to put it politely, is less than spotless.
  5. With gold crossing $1,000 (US) per ounce, Money Energy wrote a timely post on the advantages and disadvantages of investing in gold bullion, gold stocks and gold ETFs.
  6. Investors frequently confuse economic growth and stock market returns. Thicken My Wallet wonders why there is disconnect between the stock market and the economy.
  7. Do you have a question about ING Direct that you’d like to get answered? Preet is providing an opportunity to do exactly that in an interview with Peter Aceto, the big cheese at ING Direct. The most popular so far: Is ING planning to introduce a free chequing account?
  8. Michael James looks at coin collecting from an investment perspective and finds that while it provides some returns, it is nothing like conventional asset classes.
  9. Mr. Cheap outlined some beginner investment strategies to consider for various time horizons. Staying on topic, the Globe and Mail’s John Heinzl wrote a column on getting started on a couch potato portfolio.
  10. Gail is tackling the difficult topic of love and money in a series of posts. In the latest instalment, she suggests ways for one spouse to protect herself (or himself) from the money problems of the other half.

While I’m unable to highlight all the articles I run across in the weekly roundup, you can check them out through my twitter feed. Have a great weekend everyone!