Archive | July, 2010

Does This Thing Work?

This week I received an email from a reader of MoneySense magazine, where I write regularly about the Couch Potato strategy. Kate was concerned that index investing wasn’t delivering on its promises. With her her permission, I’d like to share her email and my response to her concerns, which I’m sure others share.

It’s important for new index investors to understand that the strategy guarantees simplicity and low fees, but it’s still at the mercy of Mr. Market. It’s also another reminder that ETFs may not be appropriate for small portfolios.

Dear Dan,

I have a financial advisor who oversees my investments. I was shocked to read in your articles about how much commissions and fees add up over the years. I am not financially savvy and have left it up to my advisor to deal with my investments, and I have been disappointed in how little they have grown.

Then I read an article about the Couch Potato strategy in the February/March 2007 issue of MoneySense and wanted to give it a try.  I took $10,000 and invested it in the High-Growth Couch Potato portfolio.

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Under the Hood: Claymore CorePortfolios

This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.

The funds: The Claymore Balanced Growth CorePortfolio ETF (CBN) and Claymore Balanced Income CorePortfolio ETF (CBD), a pair of ETF wraps made up of equity, fixed-income and commodity ETFs and designed to serve as complete portfolios.

The indexes: Both ETFs track versions of the Sabrient Global Balanced Index, a custom benchmark created for Claymore. The index “comprises a mixture of approximately 10-20 (or more) existing ETFs selected, based on investment and other criteria, from a defined set of exchange-traded funds trading on the Toronto Stock Exchange.”

There are Growth and Income versions of the index, each specifying a range for each asset class. For example, in the Growth index, Canadian, US and international equity must all make up 15% to 20% of the portfolio. The Income index must include 20% to 25% government bonds and 17.5% to 22.5% Canadian dividend stocks.

According to the funds’ literature, “weightings are adjusted and rebalanced quarterly to the optimal asset class mix depending on economic conditions and relative value of income and equity securities.” Translation: the fund uses tactical asset allocation,

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BMO Offers Free ETF Trades For New Clients

In a post I wrote back in February, I issued a challenge to BMO, whose line of ETFs was just eight months old at the time. In the US, Fidelity and Charles Schwab had just started allowing clients to buy and sell ETFs without trading commissions. (Vanguard later followed suit.) I suggested that the new guy in the Canadian ETF space consider something similar: “If BMO is going to make its ETF venture succeed,” I wrote, “it should offer something Canadian investors can’t get anywhere else. By allowing clients to trade ETFs without commissions, BMO would attract a wave of new customers and grab at least some of the market share from iShares and Claymore.”

Well, the good people at BMO must be avid followers of Canadian Couch Potato, because they have taken my advice — sort of. BMO is running a promotion that will give new InvestorLine clients 20 free ETF trades over a 60-day period when they open an account with at least $50,000. The promotion runs until October 29.

Here are some details from the fine print:

The ETFs do not have to be from BMO’s family.

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Another Reason to Distrust the Fund Industry

I recently had a chance to interview Ken Kivenko, who runs Canadian Fund Watch and is allied with the Small Investor Protection Association. Ken is a tireless advocate for investors who have been ripped off by the industry, donating his time and money to travel around the country and stare down investment company lawyers who try to intimidate their victims.

Kivenko recently wrote a report outlining his concerns about a new development in the mutual fund industry. The issue is a new point-of-sale disclosure document called “Fund Facts.”

Here’s the quick background. We all know that almost no one reads the entire prospectus of a mutual fund or ETF before they invest. That’s not because we’re lazy. The fact is that the average investor wouldn’t understand most of what he or she was reading anyway. For years, the Canadian Securities Administrators (CSA) has been working to create a brief, easy-to-read, standardized document that would help investors consider the risks, costs and other important features of a fund without having to wade through 40 pages of legalese. Their proposed Fund Facts document “is in plain language, will be no more than two pages and highlights the potential benefits,

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Review: The Gone Fishin’ Portfolio

Alexander Green retired at age 43 after having made his fortune as an investment adviser, market analyst and portfolio manager. He thinks the efficient markets hypothesis—one of the fundamental ideas behind the Couch Potato strategy—is bunk. “I have serious philosophical differences with those asset-allocators who recommend index funds because they believe it is impossible to beat the market,” Green writes in The Gone Fishin’ Portfolio, first published in 2008 and newly released in paperback. “That’s simply not true. I have beaten the market soundly with my own stock portfolio over the past two decades.”

So what investing strategy does Green recommend for you and me? Indexing, of course. He doesn’t spend any time throwing darts at active management. He simply explains that most people would be better off managing their own money in a simple, low-cost, highly diversified portfolio that requires minimal maintenance.

Green identifies six factors that affect a portfolio’s performance: how much you save, how long your investments compound, your asset allocation, how much your investments return annually, how much you pay in expenses, and how much you lose to taxes. Only one of these is beyond the investor’s control: “No matter how proficient you are as an investor,

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Claymore’s Bond ETF Comes Up Short

You knew it was coming, and now it’s finally arrived: the first Canadian ETF that shorts the bond market. On June 29, the Claymore Inverse 10 Year Government Bond ETF (CIB) began trading on the TSX. The fund is designed to deliver the opposite of the daily return of 10-year Government of Canada bonds. In other words, it caters to the Fear of the Month: rising interest rates.

Of course, bond prices fall when interest rates rise, and long-term bonds are the most sensitive to this risk. For more than a year, since the overnight rate bottomed out at 0.25% last April, pundits have been warning investors away from long maturities, which seem certain to fall. Meanwhile, amid all the anxiety, the iShares DEX Long Term Bond Index Fund (XLB) has returned more than 14% in the last 14 months, including distributions. The lesson here is that attempts to forecast interest rate movements is rank speculation.

That’s why this new Claymore ETF scares me. I’m concerned that Couch Potato investors, worried their bond holdings are “certain” to fall in the near future will think this product can offer some safety.

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Review: Lifecycle Investing

Most investors understand that you should have more exposure to stocks when you’re young and gradually allocate more to bonds and cash as you approach retirement. In their new book, Lifecycle Investing, Ian Ayres and Barry Nalebuff point out there’s a problem with that strategy—and they offer a solution.

Ayres and Nalebuff believe in diversifying across asset classes and agree that index funds are the best way to do this. But they argue that we must also diversify across time, something almost no one does: “Even after accounting for inflation, a typical investor has twenty or even fifty times more invested in stocks in his early sixties than he had invested in his late twenties… It’s as if your twenties and thirties didn’t really exist.”

We do take advantage of “temporal diversification” when we buy a home. When you’re in your twenties, you might save $25,000 and use it as a 10% down payment on a house, which gives you $250,000 exposure to the real estate market using 10-to-1 leverage. As you pay down your mortgage, you gradually “deleverage” as you build up equity. But even if you trade up to a bigger house a couple of times,

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