Archive | August, 2014

Ask the Spud: Should I Use Global Bonds?

Q: I was surprised to see a Vanguard infographic pointing out that international [non-US] bonds are the largest asset class in the world. Do you have any thoughts on why Canadians have not embraced international bonds in their portfolios? – A.M.

While stocks grab all the headlines and dominate the conversation among investors, the bond market is vastly larger. Yet while a diversified index portfolio can include 10,000 stocks from over 40 countries, chances are your bond holdings are entirely Canadian.

There are some good reasons for a strong home bias in bonds. The main one is currency risk. Exposure to foreign currencies benefits an equity portfolio by lowering volatility (at least for Canadian investors), but taking currency risk on the bond side is usually unwise. Because currencies are generally more volatile than bond prices, you’d be increasing your risk without raising your expected return. That’s a bad combination.

It also gets to the heart of why few Canadians have international bonds in their portfolios: there just aren’t many good products offering global bond exposure without currency risk. iShares and BMO have a number of ETFs covering US corporate and emerging markets bonds.

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Managing Multiple Family Accounts

Model portfolios like those I recommend are ideal for investors who have a single RRSP account. But life isn’t so simple once you’ve accumulated a significant portfolio: chances are you’ll be managing two or three accounts, and if you have a spouse there may well be a few more.

In most cases, it’s most efficient to consider both partners’ retirement accounts as a single large portfolio. In other words, there’s no my money and my spouse’s money: there’s only our money. This strategy has a couple of advantages: first, it allows the family to make the most tax-efficient asset location decisions. Second, it keeps the overall number of holdings to a minimum, which reduces transaction costs and complexity.

Meet Henry and Anne, who have a combined portfolio of $480,000. Let’s assume they are the same age and plan to retire at about the same time. Their financial plan revealed that a mix of 50% bonds and 50% stocks is suitable for their risk tolerance and goals. Anne has a generous defined benefit pension plan and therefore has little RRSP room: most of her personal savings go to a non-registered account.

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An Inside Look at the Financial Media

Investors love to rip into the financial media, and with good reason. So much of what passes for “investor education” is little more than worthless forecasts and attempts to explain random noise (“Canadian markets down on disappointing Portuguese GDP report”). More insidious are the pundits who do little more than talk their own book.

There’s a lot of this familiar criticism in Clash of the Financial Pundits, but what makes this new book so compelling is that the harshest words come from media commentators themselves. Authors Jeff Macke (formerly of CNBC’s Fast Money) and Joshua Brown (a CNBC contributor who blogs at The Reformed Broker) have set out to help readers and viewers be smart consumers of financial media. What should you heed and what should you ignore? The highlights are the detailed interviews with TV pundits, serious journalists, celebrity money managers and the inimitable Jim Cramer.

One of the recurring themes in the book is the relentless pressure on the financial media to produce entertainment, even if it means giving investors terrible advice. The easiest way to ensure you’ll never be invited back on CNBC is to admit you don’t know where the market is headed,

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