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Why Staying the Course Isn’t “Doing Nothing”

On Tuesday I linked to a poll of some 200 institutional investors who were asked about their outlook for global equity markets. The smart money seems to be evenly split between buyers, sellers, holders, and those who “are confused and doing nothing.”

It’s funny that investors who don’t react to market swings are said to be doing nothing. This is one of the enduring myths about index investing: that carefully building a diversified, all-weather portfolio for the long term makes you a naive fool because you’re not constantly “repositioning.”

Staying the course is not “doing nothing.” On the contrary, it’s doing something thoughtfully and productively rather than constantly reacting to the market. The first three quarters of 2011 have been a marvellous example of how diversifying and ignoring forecasts can work so well during times of market stress. To see this idea in action, let’s do a Q3 check-in with the Complete Couch Potato.

No, everything does not go down together

Dumping bonds was supposed to be part of the “reposition your portfolio for today’s market” strategy—actually it’s been a refrain for about three years now. And once again,

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Globe and Mail Best Blog Award

I’m pleased to announce that Canadian Couch Potato has been selected as the top investing blog in Canada by the Globe and Mail. The article appears in today’s issue of the paper and online here.

I’d like to thank Rob Carrick and Dianne Nice at the Globe for nominating the blog, and I want to express my gratitude to all of my readers. I believe that one of the strengths of this blog is the number of smart, sophisticated readers who leave insightful comments and engage in intelligent debates. Let’s all continue the effort to make Canadian Couch Potato the best source for information on index investing.

If you’re visiting for the first time, I encourage you to read the Couch Potato FAQ for the lowdown on index investing.


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Finding the Right Advisor

One of my favourite financial authors, William Bernstein, used to recommend that investors ditch their financial advisor and handle their portfolios themselves. But in his 2010 book, The Investor’s Manifesto, Bernstein recanted that advice: “I was wrong. Having emailed and spoken to thousands of investors over the years, I have come to the sad conclusion that only a tiny minority will ever succeed in managing their money even tolerably well.”

I’m not quite as pessimistic as Bernstein, but I agree that most people would benefit from professional financial help, even if they use an indexing strategy. The problem is that too many advisors focus on products rather than process, and their compensation models often create conflicts of interest. I discussed these ideas last week in a guest column for the Toronto Star about what you should expect from a financial advisor.

Many of my views on this issue were shaped by Warren Mackenzie of Weigh House Investor Services. I first met Warren three years ago, when he was part of MoneySense’s 7-Day Financial Makeover. The magazine invited three couples and one single woman — all self-confessed financial messes — to Toronto,

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A Case Study in Currencies

In my last post, I explained that US-listed ETFs that hold overseas stocks do not expose Canadians to fluctuations in the US dollar. This is an important idea to understand if you’re comparing ETFs that hold international equities.

Vikash Jain, portfolio manager at the Toronto investment firm archerETF, was kind enough to dig into the data and provide a real-world example of this principle. In 2009 and 2010, the MSCI Brazil Index returned a total of 51% in its local currency, the Brazilian real (BRL). During that same two-year period, the following currency movements took place:

The BRL strengthened against the US dollar (USD) by 38%

The BRL strengthened against the Canadian dollar (CAD) by 14%

The CAD strengthened against the USD by 21%

Jain explained how all of this would have affected the returns of investors who held the iShares MSCI Brazil Index Fund (EWZ), which is traded in US dollars:

An American holding EWZ would have received the 51% index return, plus a big boost because the BRL shot up 38% against the greenback. In USD terms, he would have earned 109%.

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Couch Potato Takes Manhattan

This will be my only post of the week, as I am currently on a family vacation in New York City. I spent today in the Financial District, approaching bankers and other well-dressed individuals on Wall Street and asking them if they had considered embracing a low-cost indexing strategy. Most ignored me. Some swore colourfully. My children were frightened.

During quieter moments, I’m rounding out my summer reading this week with John Bogle’s Enough: True Measures of Money, Business, and Life. Bogle, as long-time Couch Potatoes will know, is the founder of The Vanguard Group and the father of index investing. This book contains no practical advice for investors; rather, it’s a reflection on everything that has gone wrong in business and finance in recent years. In the world of investing, Bogle sums things up like this:

Too much cost, not enough value
Too much speculation, not enough investment
Too much complexity, not enough simplicity

Amen to all three points. It’s hard to overstate the influence that Vanguard and Bogle himself have had on investing in the United States. Not only is Vanguard now the largest mutual fund company in the world,

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Follow Canadian Couch Potato on Twitter

Canadian Couch Potato has finally joined the Twitter universe!

I’d like to encourage readers to add this blog to their Twitter list, and to tweet any individual posts they find interesting. Of course, I wouldn’t ask you to do that for nothing, so I’m offering a little incentive. At the end of this week, I’ll draw a name from all of those who helped spread the word and I’ll send one lucky Couch Potato a potato masher from Cutco!

This is no cheap utensil from the dollar store: it’s a restaurant-quality, masterfully engineered  product that retails for $53. It’s highly diversified — it works on potatoes, squash, pumpkin pie filling, even guacamole. The ergonomically designed handle makes it easy to buy and hold. Best of all, there’s no MER and no deferred sales charge.

Here’s how to be entered into the draw for the potato masher:

Follow me on Twitter by clicking the link in the sidebar at right. Every new follower will receive three (3) entries in the draw.

Tweet any past or current article to your followers by clicking the “tweet” icon at the top right of each post.

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When Couch Potatoes Go Bad

Paul B. Farrell, a long-time columnist with MarketWatch, seems to have taken leave of his senses.

For years, Farrell has been a staunch defender of index investing, and he has tracked the performance of eight Lazy Portfolios of index funds and ETFs, each created by popular finance authors or prominent investment advisors. (All of them are designed for American investors, but Canadians can easily modify them.)

On July 13, Farrell wrote a column announcing that all of the funds in the Lazy Portfolios finally have a 10-year track record. So for the first time, he was able to review their decade-long performance, and the results were that all of them beat the S&P 500. Granted, the S&P 500 returned –1.59% over those 10 years, which means my chequing account was a better investment, and a large-cap US index is not an appropriate benchmark for a diversified portfolio. But in any case, most of the Lazy Portfolios managed to eke out gains between 2% and 5% during a decade that started and ended with massive crashes, which is a relatively good result.

The problem is that Farrell isn’t following his own advice.

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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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Canada’s Best Investing Blogs

The Globe and Mail is running a poll to determine the best investing blogs in Canada, and I am honored that Canadian Couch Potato is on the shortlist. If you’ve been a loyal reader, I would be grateful if you would take the time to cast a vote for your humble spud.

The Globe poll also includes personal finance blogs that cover topics other than investing. You will need to vote for at least one of these in order to get to the investing ballot.

The panel who came up with the shortlist included the venerable Ram Balakrishnan, better known in the blogosphere as Canadian Capitalist, the Globe‘s personal finance columnist Rob Carrick, and Globe contributors David Breman and Chaya Cooperberg.

Many thanks!

[Update on May 25: CCP finished second in the poll behind Congratulations, Preet!]

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