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moneysense.ca, 14/03/08
This and That
Current issue:
- As gold hit $1,000 an ounce this week, it is entirely predictable that the crowd is chasing gold writes Jason Zweig in Money magazine.
- Mark Hulbert reports in The New York Times on a research that found that American investors spent $100 billion on the quest to beat the markets.
- In the brouhaha over Eliot Spitzer’s downfall, his contributions to clean up Wall Street should not be forgotten writes Larry MacDonald.
- Million Dollar Journey wrote about his Smith Manoeuvre setup including a nifty chart to track the flow of money.
- Jon Chevreau reports on how actively managed funds compared with the index in 2007.
moneysense.ca, 14/03/08
I checked out that Smith Manoeuvre setup article. My current rule of thumb for investing is that if it’s complicated, then someone else is making money instead of me. I consider leverage to be dangerous. You can make a bit of extra money in the short or medium term, but eventually something trips you up and you take a bath on the unwinding. Better to save and invest than borrow, invest and pay back.
I like Al’s rule of thumb: “if it’s complicated, then someone else is making money instead of me”. It works for many things including the Smith Manoeuvre, mutual funds, and car leases.
Al, Michael: I agree with you both and that’s why I personally avoid complicated strategies and doubt that the Smith Manoeuvre is suitable for most people.
Thanks for the mention CC. I used a program similar to Visio (free version) to create that chart.
A good rule of thumb, but with any rule, their are exceptions. A CPCC is a very complicated undertaking for a professional with complex paperwork and increased accounting and lawyer fees. However, the benefit of tax deferred savings up to 400k/year is profound.
A full service broker witha wrap account provides “easy” investing. All you have to do is send money, and they take care of the rest. Once a year you go in to review your returns and strategy with them. They ask if you want a coffee and give you box seat hockey tickets on the way out the door. Nothing could be easier, but someone is making a lot of money instead of you, and you are paying dearly for the coffee and hockey tickets.
Full service banker…..$100/month, and we’ll take care of all the banking for you. A personal banker will be assigned that you can call directly any time. Beats calling the 1-800 number with 12 electronic options as a DIY’er, but it costs you a pretty penny.. I could go on……
Neil
Hey Neil,
I certainly agree that the reverse of my statement is not true, that uncomplicated is always good. The upside of uncomplicated is that you can figure out what is going on. The game now a days seems to be to have as many fees as possible, and hide them as well as possible. I recently had an RESP info session where the upfront fees were presented as a good thing, and I had to do a lot of reading to figure out they were 20%. On top of that, the 20% was taken off before the CESG.
Here’s another study pertaining to the active vs index strategies:
“Active management, as measured by Active Share, signicantly predicts fund performance. Funds with the highest Active Share outperform their benchmarks both before and after expenses, while funds with the lowest Active Share underperform after expenses. In contrast, active management as measured by tracking error does not predict higher returns.”
http://www.som.yale.edu/Faculty/petajisto/active72.pdf
The Smith Manoeuvre reminds me of some business financing arrangements in a business finances a subsidiary in a second jurisdiction by taking out a loan at home, funnelling the money to a subsidiary in a low-tax third jurisdiction in the form of equity, which in turn loans the money to the co-subsidiary in the second jurisdiction. The interest payments are deductible by both parent company and by the subsidiary in the second jurisdiction. The arrangement is called a double dip because the interest is deductible twice.
Complicated financial structures don’t make sense for the little guy, typically because the transaction costs kill you in the end. The less you understand your investments, the more you will have to shell out your hard-earned money to pay for someone who does. So, if you’re not a sophisticated investor, you should probably stay away from sophisticated and complicated financial products.
Robillard: Kinda like ABCPs?
Jon D. is of course referring to asset-backed commercial paper, which is a money-market contract collateralised by some kind of asset like a bunch of receivable mortgage payments. When the sub-prime crisis first hit, the market for ABCP dried up because of doubts over real value of the collateral.