Archive for October, 2011

This and That: Ponzi schemes, experts and more…

October 6, 2011


Before we kick off, I want to take a moment and wish all our readers a very happy Thanksgiving! Now, onto this week’s interesting stories…

Institute for Financial Learning Ponzi Scheme: Last weekend, CTV’s W5 asked some tough questions as to why authorities allowed an alleged Ponzi scheme run by the Institute for Financial Learning to go for years despite many red flags. Investors in IFFL believed that they were investing in “gold mines” but the money is alleged to have been siphoned off to shell companies abroad.

The Trouble with Experts: CBC ran a documentary last week on why most of the predictions we hear in the media turn out to be dead wrong. It is also surprising to hear how easy it is to become an “expert” on something.

Why bother saving money?: In a story featured in Maclean’s magazine, ants, stung by prolonged low interest rates and envious of seeing grasshoppers living it up, are starting to doubt whether their thrifty habits are worth it. Ants should stop fretting because “everyone’s doing it” is usually a very poor rationale for piling on debt.

Bogle rails against ETFs: In this interview, John Bogle stridently criticizes ETFs, which he believes encourages excessive trading that in turn, reduces returns. It seems to me that the criticism should be directed at investor behaviour, not the product itself.

Lump sum investing beats DCA: Larry Swedroe posted on some interesting research that showed that lump sum investing beats dollar cost averaging about 70% of the time. The trouble with DCA is that one can be never sure whether there will be a market crash just as the last installment is invested.

Around the blogs

Tom Bradley of Steadyhand funds says that despite the market uncertainty he is confident about some things.

The Blunt Bean Counter argues that capital gains tax should not influence the decision of when to sell a stock.

Million Dollar Journey featured a guest post on socially responsible investing.

Today’s Economy Blog’s Kevin Press who now has a new home at says that Canadian investors should diversify their portfolio into foreign equities.

Market timing remains a very tough game. Larry MacDonald reported that housing prices are still marching upward with gains in most cities across Canada.

Preet Banerjee featured an guest insightful post on how professional stock traders view stock analysts.

Retire Happy Blog’s Jim Yih finds out the secrets to becoming a millionaire by 35.

Michael James on Money pans a “no interest with minimum payments” Sears Financials offer.

Currency Unhedged Portfolios Are Less Volatile

October 5, 2011


As I pointed out in my previous post, equity markets around the world lost quite a bit of value in the third quarter of 2011. However, the Canadian dollar also posted a significant loss against the US dollar and Japanese Yen and remained more or less flat against the Euro and the Pound. As a result, portfolios that held international stocks without hedging away the currency risk did not lose as much as portfolios that employed currency hedging. This is not a new phenomenon.

In a recent post (See Vanguard Canada initial ETF offering falling short), PWL Capital’s Justin Bender took a look at the risk and return characteristics of two balanced portfolios with significant foreign stock holdings. Both portfolios allocated 30% to the iShares S&P/TSX Capped Composite ETF (XIC) and 40% to the iShares DEX Universe Bond ETF (XBB) to gain exposure to Canadian stocks and bonds respectively. One portfolio allocated 15% each to two currency hedged ETFs: iShares S&P 500 CAD-Hedged ETF (XSP) and iShares MSCI EAFE CAD-Hedged ETF (XIN). The other portfolio allocated 15% each to iShares S&P 500 ETF (IVV) and iShares MSCI EAFE ETF (EFA).

Mr. Bender found that between December 2005 and August 2011, the CAD-hedged portfolio posted slightly lower returns than the currency-unhedged portfolio (3.75% versus 3.81%). Interestingly, the Canadian dollar was valued at USD 0.8557 in December 2005 and at USD 1.0221 in August 2011. In other words, the currency-hedged portfolio underperformed the unhedged portfolio even though the Canadian dollar appreciated 19% against the US dollar. During the same time period, the Canadian dollar lost 3% against the Euro, lost 24% against the Yen and gained 27% against the Pound Sterling.

The currency unhedged portfolio was also much less volatile. The Standard Deviation of the unhedged portfolio was 7.9%, significantly less than the 9.3% SD of the CAD-hedged portfolio. A graph of the 3-year rolling SD shows that the CAD-hedged portfolio is consistently more volatile.

3-year Rolling SD of Currency Hedged versus Unhedged Portfolios. Source: PWL Capital

ETF vendors should take note of these findings and instead of launching even more CAD-Hedged ETFs, they should be focusing on providing investors with more (and better) choice in the form of broad market ETFs that directly hold foreign stocks or ETFs.

Sleepy Portfolio 3Q-2011 Report Card

October 2, 2011


Background: I started the Sleepy Portfolio in 2005 to benchmark my personal portfolio, the bulk of which was invested in individual stocks at that time. The portfolio started off with an initial cash infusion of $100,000 but no new money has been added since. This is a real world portfolio: every transaction is made at the bid price, commissions are paid and foreign exchange conversions are done at retail rates. The portfolio has a target allocation of 5% cash, 15% short bonds, 5% real return bonds, 20% Canadian stocks, 22.5% US stocks, 22.5% Europe and Pacific, 5% Emerging markets and 5% REITs. The entire portfolio (apart from the cash portion) is invested in broad-market, exchange-traded funds (ETFs) trading in the Canadian and US stock exchanges. The cash portion is invested in a high-interest savings account that is available through many discount brokers.

The third quarter was a bad one for the stock markets: the TSX Composite fell 12.6 percent, the S&P 500 fell 14.3 percent, EAFE markets fell 19.60 percent in US dollar terms and Emerging markets fell 23.2 percent in US dollars. The Canadian dollar lost quite a bit of its value against the US dollar as well losing 8.7 percent. Since half the value of the Sleepy Portfolio is denominated in US dollars (note that though VEA and VWO are denominated in US dollars, Canadian investors are exposed to currency risk between the CAD and the basket of currencies that the ETF holdings are denominated in — Pound, Yen, Euro etc., not the CAD-USD exchange rate) , the loss in value of the Canadian dollar helped cushion the steep drop in stock values. As of October 1, 2011, the Sleepy Portfolio is valued at $125,766, a loss of 7.7 percent in the third quarter of 2011. Bonds held up quite nicely: both XSB (short-term Canadian bonds) and XRB (real-return bonds) posted modest gains. Canadian REITs were a surprise. XRE, the REIT ETF, was down slightly.

Here’s how the portfolio looked as of October 1, 2011:

[Sleepy Portfolio Snapshot as of October 1, 2011]

The only activities in the portfolio during the quarter were distributions from the component ETFs, which totalled $606. If EAFE markets continue to slide down even more, we’ll be selling a bit of cash, bonds and REITs and buying VEA.