Archive | Book reviews

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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What Young Investors Need to Know

When I first became interested in indexing, someone recommended William Bernstein’s The Four Pillars of Investing. Originally published in 2002, the book has become a classic for its insight and wisdom, and for Bernstein’s entertaining, no-nonsense style.

But as much as I loved Four Pillars, the 330-page tome wouldn’t be my top pick for a teen or twentysomething who is just getting started. Fortunately, young investors can now begin with a more inviting volume. Bernstein has just released a brief e-book called If You Can: How Millennials Can Get Rich Slowly, available in Kindle format from Amazon for $0.99. And for the next day or so, you can download it for free.

If You Can reveals what Bernstein calls the Five Horsemen of the Personal Finance Apocalypse: the hurdles young people will need to overcome if they are to become successful investors. (The latter four are the same pillars Bernstein wrote about in his earlier book.) At the end of each section, he makes a recommendation for further reading. Here’s a summary of his advice to the millennial generation.

1. You need to save more.

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Your Guide to the (Even More) Perfect Portfolio

I’m pleased to announce that the 2013 edition of The MoneySense Guide to the Perfect Portfolio is now on sale. The book is available wherever you would buy MoneySense magazine, including newsstands at Chapters, Shoppers Drug Mart, Walmart and Loblaws. You can also order it online at the Rogers Publishing e-Store. The book retails for just $9.95, or about the cost of a single ETF trade at your discount brokerage. We’re hard at work on e-book versions for Kindle, Kobo and Apple devices and I’ll let readers know as soon as these are available.

This is the third edition of my guide for do-it-yourself index investors, which was first published in 2011. Most of the content is the same—the fundamentals of smart investing don’t change—but this edition has been thoroughly updated. The most significant change is the final chapter, which now includes a version of the ETF All-Stars article I wrote for the February/March issue of MoneySense. (The full article is available in PDF format from the Rogers Publishing e-Store for $2.99.) This includes a list of 21 ETFs that can form the building blocks of virtually any Couch Potato portfolio.

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Is Your Portfolio Just a Pile of Parts?

Is there difference between a diversified portfolio and a collection of investments? That’s an insightful question Chris Turnbull asks in his new book Your Portfolio is Broken: Who’s to Blame and How to Fix It.

Turnbull is a portfolio manager with The Index House, an Edmonton wealth management firm. In his self-published book (available from Amazon), Turnbull explains that when he worked as a broker he would “recommend stocks, bonds, mutual funds, preferred shares, structured products, term deposits, new issues, and other types of securities, according to client preferences.” Often the clients would make their own suggestions, and those would end up in the portfolio, too. By the time he decided to end his career as a broker, his clients “collectively held 185 different mutual funds plus hundreds of stocks, bonds, and other securities.”

In other words, his clients didn’t have diversified portfolios: they simply had collections of investments. Turnbull uses an apt metaphor: “If, over many years, you acquired all the parts you thought you needed to assemble a car and you piled them up in your garage, would it be a car?

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Seeing Diversification in Action

Why should you add multiple asset classes to your portfolio? That seems like a simple question, but it’s one many investors would answer with only a vague comment about “more diversification.” It’s more precise to say you do so to increase expected returns or to decrease volatility. Sometimes these are mutually exclusive, but Harry Markowitz won a Nobel Prize for explaining that you can sometimes accomplish both at the same time. That insight is the basis for Modern Portfolio Theory.

One of the clearest illustrations of this idea can be found in Larry Swedroe’s book Think, Act, and Invest Like Warren Buffett, which I reviewed late last year. Swedroe shows how the return and risk characteristics of a 60/40 portfolio change as you slice and dice the equity allocations.

A portfolio made up of just the S&P 500 and five-year Treasuries returned 10.6% annually from 1975 through 2011, with a standard deviation of 10.8%. By gradually splitting that equity allocation into multiple asset classes (international stocks, value stocks, small caps, and commodities) the portfolio’s annual return increased 150 basis points to 12.1%,

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What Would Buffett Do?

When I set out to educate myself about investing, Larry Swedroe was one of the most influential authors I encountered. What I loved about his books (including The Only Guide to a Winning Investment Strategy You’ll Ever Need and, more recently, The Quest for Alpha) was that every argument was backed up by academic research.

So I was surprised to see his latest book, Think, Act, and Invest Like Warren Buffett, is a slim volume with only a few scattered footnotes. And knowing Swedroe’s passion for passive investing, I wondered why his title invoked the world’s greatest stock picker. I recently had the pleasure of speaking with Larry Swedroe via Skype, and he shared the backstory:

“I’ve learned over the years that relatively few people are interested in the evidence and the data. Maybe 10% of the audience wants that stuff: engineers love my other books, and they wouldn’t like this one. Then there are those you might call investment geeks who want all the research, and they will even read the original papers. But for the vast majority it’s, ‘Just tell me the answer,

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An Interview with John De Goey

On Monday, the UK implemented new rules banning embedded commissions on investment products. We’re still many years away from that in Canada, but it’s not for lack of effort on the part of John De Goey. For a decade now, the associate portfolio manager at Burgeonvest Bick Securities in Toronto has been a thorn in the side of the industry. Like almost all his contemporaries, De Goey started out selling mutual funds with deferred sales charges, but later become one of the early adopters of the fee-based, no-commission business model.

I chatted with John about his recently published book, The Professional Advisor III: Putting Transparency and Integrity First, a passionate plea for changes to the advice industry. Here’s an excerpt from our interview.

The first two editions of your book were published back in 2003 and 2006. A lot has changed in the investment industry since then.

JDG: When I wrote the first two editions, I knew more people in the advisor media—Advisor’s Edge, Advisor’s Edge Report, Investment Executive—and they were the ones writing about the book.

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What Investors Can Learn From Weather Forecasts

I’ve never made a secret of my opinion that acting on market forecasts is destructive to investors. Nate Silver’s fascinating new book, The Signal and the Noise: Why So Many Predictions Fail—But Some Don’t includes some telling examples from the world of finance, but he drives home this idea even more forcefully with his insights about the weather.

Silver explains that meteorological forecasts are quite accurate if they’re made just a few days in advance, but the further out you go, the less helpful they become. Forecasts made eight days in advance are useless, and beyond that they’re actually harmful: “They are worse than what you or I could do sitting around at home and looking up the table of long-term weather averages,” Silver writes. Yet despite being aware of this evidence, The Weather Channel and AccuWeather make forecasts for 10 days and 15 days into the future, respectively.

The book also describes how for-profit weather services are more concerned with the perception of accuracy than with accuracy itself. This gives them an incentive to be bolder than they should be. If their models forecast a 50% likelihood of rain,

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Perfect Portfolio E-Book Now Available

The MoneySense Guide to the Perfect Portfolio—my how-to book for Canadian index investors—is now available in electronic formats. If you have an iPad, Kobo or Kindle you can now become a Couch Potato without even leaving the house. You can buy your very own e-book for just $4.99 by clicking one of the links below:

 Apple iPad Edition

 Kobo Edition

 Amazon Kindle Edition

You can rebalance next week

In other international news, US stock exchanges are closed for the second day due to the dangers posed by Hurricane Sandy. If you were planning to make any ETF trades in your portfolio this week, you should be aware of how these closures might affect you. The Canadian ETF Association released the following notice yesterday:

Investors should expect wider than normal bid/ask spreads while the U.S. markets are closed and we recommend all investors exercise caution if trading.

Most Canadian listed ETFs which have exposure to U.S. securities can be traded today. Investors need to understand that the price they pay for these ETFs may not reflect the underlying net-asset-value of the ETF which cannot be accurately determined with U.S.

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