Archive | Book reviews

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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Review: Abnormal Returns

Tadas Viskanta’s blog, Abnormal Returns, has gained a large and prestigious following during its seven-plus years. His new book of the same name also deserves a wide readership. Abnormal Returns (McGraw Hill, 2012) is not so much an argument for a specific strategy as a catalogue of wisdom. “This book should be read more as an exploration of a series of investment topics as opposed to some sort of doctrinaire investment philosophy,” Viskanta writes.

In his chapter on equity investing, he discusses the surprising relationship between the stock market and the economy. From listening to the news, it’s easy to infer that a weak economy produces poor market returns, but the last three years have shown it’s not that simple. The US, he writes, “continues to operate with generally tepid economic growth, headline unemployment rates well in excess of 9%, and a budget deficit well in excess of a trillion dollars,” yet the S&P 500 has more than doubled since 2009. The lesson is that weak economies are a bit like value stocks, while the burgeoning emerging markets are closer to growth stocks. For the patient investor, it is value that outperforms.

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The Second Coming of the Perfect Portfolio

The anticipation has been palpable, I know, but the waiting is over. The second edition of The MoneySense Guide to the Perfect Portfolio is now available.

The first edition of my handbook for do-it-yourself index investors, published last October, sold out quickly as Couch Potatoes stampeded to their local newsstands to demand a copy. The revised second edition should now be available across Canada on magazine newsstands at Chapters, Shoppers Drug Mart, Walmart and Loblaws. It’s also available online, and if you order 51 copies or more, you get a hefty discount. Order 99 and you save even more. [Update: Perfect Portfolio is now available in Apple iPad, Kobo. and Kindle editions.]

While the second edition is very similar to the first, there have been a surprising number of developments since last fall. Vanguard arrived in Canada, Claymore was bought by BlackRock, and three brokerages now offer commission-free ETFs. The guide has been updated accordingly.

Now with improved performance!

I have long wanted to compile more complete historical performance data for my model portfolios,

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A New Book for Beginning Investors

Last fall, Glenn Cooke approached me with an idea. In addition to his work as an online life insurance broker, Glenn manages the network that includes some of Canada’s most popular money bloggers. He wanted to bring together several of those bloggers to collaborate on a book, and I agreed to help out as editor.

After many months of work, I’m happy to announce that The Beginner’s Guide to Saving and Investing for Canadians is now available. The 100-page book is divided into five chapters, each written by a contributor with expertise in a specific area of personal finance. I’m sure you’ll recognize the names and the blogs:

Krystal Yee, a columnist at Moneyville and the blogger behind Give Me Back My Five Bucks, shows you how to create a budget. This may be the most important step in a financial plan, because investing won’t help you if you’re spending more than you earn.

Jim Yih of Retire Happy Blog explains where to save your money. He covers the basics of pension plans, RRSPs, Registered Education Savings Plans,

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Carl Richards on Performance Chasing

A couple of posts ago, I asked why everyone isn’t beating the market when there are a dozen or more strategies that promise long-term outperformance. I argued that the problem wasn’t so much that the strategies themselves were flawed: the more important issue is that investors tend to quickly lose patience when their strategy isn’t working. What often happens is they move to another strategy that worked well recently, and soon they fall into a pattern of doing what Larry Swedroe calls “driving forward but looking in the rear-view mirror.”

I had an opportunity to sit down with Carl Richards, author of The Behavior Gap, when he was in Toronto for a presentation on May 22. Carl shared a couple of illuminating stories that make this point far more effectively than I did:

“I had been in the business maybe five years, working a brokerage that will remain unnamed but has a bull as its symbol. Part of what we did there was manager search and selection, and I remember this one occasion when we hired the Davis New York Venture Fund,

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Market Timing Goes to College

In recent years, the so-called Yale Model has been extremely popular with investors. The model is an attempt to mimic the investment strategy used by Ivy League endowment funds, which have an outstanding track record of beating the market indexes. David Swensen, the superstar manager of the Yale endowment fund, delivered returns of 10.1% annually from 2002 to 2011, a decade when stocks returned 3.9%. The Harvard endowment returned 9.4% over the same period and has grown 12.9% annually over the last 20 years.

The Ivy Portfolio, by Mebane Faber and Eric Richardson, describes how Yale and Harvard use an asset allocation model that is broadly similar the Couch Potato strategy. The key difference, however, is that the endowments include a number of asset classes that are not available to retail investors, including private equity, hedge funds, and direct ownership of timber resources and commercial real estate.

The first half of Faber and Richardson’s book is a fascinating look at how individual investors can mimic the Yale Model. The authors quote both Swensen and Jack Meyer (Harvard’s former endowment fund manager), both of whom recommend building diversified portfolios with low-cost index funds.

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The Models Are Broken—But Indexing Still Works

If you’ve researched the theoretical foundations of index investing, you’ve no doubt come across Modern Portfolio Theory and the Efficient Markets Hypothesis. And if you read the commentaries of active money managers and the financial media, you’ve probably seen countless articles that dismiss both as obsolete. Modern Portfolio Theory is declared dead after every market crash, and all stock pickers, almost by definition, believe markets are not really efficient. Many of these critics think passive investing is folly—only the warm embrace of active management can protect you and your portfolio.

In his provocative book, Risk, Financial Markets & You, the Winnipeg-based financial advisor Alan Fustey adds his own criticisms of these two decades-old models. But his conclusion is surprising. When I interviewed him recently, I asked what investors should do if these models were broken. “Well, the first thing you do,” Fustey replied, “is you index.”

The background

Before going further, let’s review these two landmark financial theories, both of which revolutionized investing. Modern portfolio theory was devised in 1952 by Harry Markowitz, who later shared a Nobel Prize for his contribution.

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Closing the Behavior Gap

I once went to an investment seminar at my local library. It was attended by a handful of folks who had little or no experience with investing and were looking for someone to put them on the right track. The guy leading the session held up a copy of the Globe and Mail business section and encouraged us all to read it every day so we could learn what was happening in the economy and apply it to our investments.

That is some of the worst financial advice I’ve ever heard, and if Carl Richards had been there I imagine he would have thrown a few rotten eggs and tomatoes. Richards’ new book, The Behaviour Gap: Simple Ways to Stop Doing Dumb Things With Your Money, spends most of its 178 pages encouraging investors to ignore the headlines and focus on the real determinant of financial success or failure: ourselves.

“Forget about what’s going on in China or global demand for the dollar or the price of gold,” Richards writes. “While we’re worrying about those things, we could be doing things that actually make a difference in our financial lives—like working or trying to figure out how to save or earn a little more.”

Richards is a financial planner and a New York Times blogger who has a remarkable talent for distilling his insights into napkin sketches.

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Why We Love the One We’re With

Larry Swedroe’s new book, Investment Mistakes Even Smart Investors Make and How to Avoid Them, includes 77 common behavioural blunders. I don’t think there’s anyone alive who hasn’t made at least a dozen of them. In fact, I know two investors who recently fell prey to Mistake 11—and one of them was me.

Mistake 11 in Swedroe’s catalogue goes like this: “Do You Let the Price Paid Affect Your Decision to Continue to Hold an Asset?” This error is what behavioural economists call the endowment effect. It’s what makes us place a greater value on something just because we happen to own it.

Imagine that you want to attend a hockey game. You don’t yet have a ticket, and you decide that you’re willing to pay no more than $100 for one. The next day, you win a ticket to the game in a radio contest. If a friend offers to buy that ticket from you, for what price would you be willing to sell?

If you were purely rational, you would accept any price over $100, since that’s the maximum value you placed on the ticket before you had one.

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