Month: November 2005

Doom and Gloom

There is an interesting chart here, “Asset Class Performance” (got the link from here) showing the performance of various asset classes since 2000 and giving several predictions. One comment said: “I believe all will fall, while bonds will soar. special thanks to debt deflation depression.” The poster leaves no website to track him down unfortunately.

While digging around in Google for the term “debt deflation depression,” I found found this article: “Will the Latest Oil Price Shock Lead to a U.S. and Global Recession?”

Interesting article with some interesting comments as well. The comment that Google picked up was this prediction:

I don’t understand how you can face two decades of real wages lagging productivity world wide, and still not be 100% convinced that a major depression is guaranteed in the coming years. The only way for consumers to absorb higher oil prices would be to take on more debt. As long as debt can be piled on, growth can go on, but there is no doubt that debt growth is the one and only fuel of the present growth.

Take away the US and european overindebted consumers, meaning, take away housing boom asset wealth induced spending… And the world falls into 30’s like debt deflation depression.

And if there’s one way out, I’d like to see it. Apart from aggressive monetising of public deficit, and aggressive policies in favor of higher wages (and I see none of them coming in the coming years), I can’t think of any.

So ?
So is there a question ?
Of course higher oil prices and lower house prices, will force the world into depression. Higher oil prices may indeed speed up the top of the debt-housing boom.

Talk about doom & gloom. Also no website provided for that comment either. No one really knows exactly what will happen in the next few years, but I have certainly seen a lot of doom & gloom predictions popping up lately regarding the stock market, real estate, and the US economy. I try not to let any predictions I read dictate my behaviour. I am invested for the long term and realize that market fluctuations are a fact of life. I am prepared to stay invested no matter happens and to invest consistently in my RRSPs year after year (especially when markets are down).

Diversify, or Quit Your Day Job

Saw this article, “To Diversify or Not to Diversify” on the Canadian Capitalist’s blog and at Consumerism Commentary. Kiyosaki seems to recommend not diversifying (for “any investor who wants to be a rich investor”) yet he keeps reminding us that “to become a professional investor, the price of entry is focused dedication, time, and study” and that finding the best investments (focusing) means “sifting through hundreds of offers, studying, analyzing, and determining the pros and cons of each.” He is correct. For me to not diversify my portfolio, I would have to devote my entire day (and life) to investing.

And finally he says one of the reasons “the rich get richer is because they are focusing, while the middle class is diversifying.” He fails to mention the possibility that the rich are getting richer because they have access to far better (and more costly) financial advice than the rest of us, and access to far more capital which gives them access to far more investment and speculation opportunities. And he fails to mention getting better financial advice as an alternative to diversifying. Instead, he tells us blindly focus our investments rather than diversifying, because after all “people like Warren Buffett, Oprah Winfrey, or Lance Armstrong, they have all focused intensely in order to win.” He also fails to mention that some of the rich have probably become poorer because they are focusing.

So what’s the point of the article? I think it’s that you should quit your day job, and start “focusing on finding the best investments” so that you can be the next Warren Buffett. Or “if you choose to remain an amateur — a passive investor — then, by all means, diversify.” Well folks there’s no shame in being an amateur or a passive, defensive investor. In fact you will probably have far better success if you pursue this path. Benjamin Graham explained the dangers of trying too hard so well in the first chapter of the Intelligent Investor:

A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom. If you merely try to bring just a little extra knowledge and cleverness to bear upon your investment program, instead of realizing a little better than normal results, you may well find that you have done worse.

Since anyone–by just buying and holding a representative list–can equal the performance of the market averages, it would seem a comparatively simple matter to “beat the averages”; but as a matter of fact the proportion of smart people who try this and fail is surprisingly large. Even the majority of the investment funds, with all their experienced personnel, have not performed so well over the years as has the general market. [italics his]

Life without credit cards – 2 week update

I did not announce it on this blog, but the week of November 6th, my wife and I stopped using our 2 credit cards, AMEX Gold and BMO Mosaik Mastercard, altogether. We basically told ourselves to stop using them, and to start using cash or debit for everything. I had thought for a long time that we were overspending because we were buying on credit, much like a university student will spend more money if they have a student loan then if they didn’t. As long as we paid of our cards promptly, I thought, they were a pretty good deal. One month interest-free plus the convenience. Wrong, according to The Wealthy Barber:

For most people, they’re not a good deal. The convenience that you view as positive can combine with human nature to form a destructive force, especially in the hands of someone who loves to shop. How many times have you bought something with your credit card that you wouldn’t have bought if you’d had to pay cash? And isn’t it usually something that you know you could live without? Then how many times have you opened your credit-card bill, clutched your throat, and shrieked, ‘Five hundred dollars! What the heck did I spend it on?’ So the fact is that many people who pay off their balance each month are still hurt by their use of credit cards.”

This described us pretty much exactly, so it was after reading this that I decided to work towards not using credit cards EVER. I realize that I will have to use them for many online purchases. However, those will be few, and it will be easy to transfer some money from chequing to the credit card immediately after making the online purchase.

We have made good progress so far. The last charge on our AMEX was on November 6th. The last charge on our BMO Mastercard was on November 11th. There was one other $4.25 parking fee charged to our BMO which was then paid down immediately that day and I also charged almost $200 to our Mastercard for dental work but I expect to get reimbursed for that from my employer well before it comes due (unfortunately we have to pay our dental claims up front before getting reimbursed from my company). I find that I have spent far less in the past few weeks than I have in a long time. I almost made a $300 purchase on a new computer case and hard drive two weeks ago, but after looking at the balance in our chequing account, I hesitated. That is a typical expenditure that I would have treated as a need before, charging it to my credit card without thinking. Now I realize that it is a want, and that I can live without it. We have a savings account for these wants and I will reconsider that purchase once there is more saved up. I was also wooed in the past by the Air Miles scam (both our credit cards are Air Miles credit cards). After 8 years of collecting, and enough points for just one flight, I am completely turned off by them. Nothing more than a scam intended to get me to spend more on my credit cards.

Here’s more thoughts on cash vs. credit cards from “Free Money Finance: Eight Unusual Ways to Create Cash“:

It seems impossible to exclusively use cash in today’s credit-oriented world, but those who do “create” significant cash. How? By spending dramatically less. Ron Blue, author of Master Your Money, notes that the mere use of credit cards causes a family to spend 34 percent more even if the statement is paid off monthly. Author Nancy Dunnan agrees in Never Call Your Broker on Monday by noting, “People like your parents or grandparents actually went through life using checks or cash. It worked then and it works now. Do the same and you’ll wind up spending 20% to 45% less.”

Check out the first comment on that post, and also the comments on this post. Unbelivable how attached people can be to their credit cards and those “cash-back rewards.” I am still firmly of the opinion that the best credit card out there is no credit card.

Money NUT

Just read a great article about being a Money NUT. Since I am a money nut myself, I agreed with a lot of what he said, including the part about financial blogs which I am have recently become more a part of:

I read financial related blogs. Over the past year, by both posting on my blog, and by continually reading all the other personal finance blogs, I’ve found that I am always reinforcing my values. Being a part of the PF blog community has given me the motivation to always make our net worth number go up and to follow the principles that most of us share. It’s like a support group without the circle of chairs.

He asks “Do you get the jokes about being ‘cheap’, or a ‘tightwad’?” I have definitely been called cheap before, but I don’t mind any more. Actually my dad and my dad’s dad are probably called “cheap” more than me so maybe it’s going to get worse with age. But they’ve also done better than anyone else I know at saving their money and building significantly large nest eggs without having ultra high-paying jobs and without sacrificing quality of life.

Cut and run: portfolio update

After reading this bearish post, “Sell some winners and most of your losers” I am thinking of increasing the cash-equivalents (bonds, money market, cash) portion of my portfolio.

I have an all-equity portfolio right now at TD, but I am just a few months away from transferring all my investments to Clearsight. Just waiting for the no-sell period to expire on some of my funds so I don’t get dinged with early redemption feeds. Once I switch to Clearsight I will assume a 25-75 bonds/equities ratio eventually. So I do not see this as a market timing strategy, but simply a re-allocation to where I will be in a few months/years from now anyways. This is my portfolio at TD as of now:

Fund % of holdings
TD CDN Equity 4.450%
TD CDN Money Mkt 7.680%
TD CDN Small-Cap Equity 4.460%
TD Emerging Mkt 1.770%
TD Global Select 13.320%
TD Science &Tech 3.480%
TD Energy 4.920%
TD US RSP Index-e 10.770%
TD Int’l Index-e 11.030%
TD CDN Blue Chip Equity 14.470%
TD Dividend Growth 14.230%
TD US Mid-Cap Growth 14.230%

The reason the money market fund is there is because that is the only thing I could put money into that doesn’t have a 90-day no-sell period. Before the monthly transfers from Clearsight were in effect I wanted to put my money somewhere (so I couldn’t spend it). Don’t ask me why I don’t have 25% bonds in my TD portfolio. I actually used to have at least that much but for some reason (can’t even remember), I sold them. That’s partly the reason I’m leaving TD. I want an advisor between me and my portfolio to stop myself from excessive trading and pointless fiddling. I think I’ll sell the Science & Tech fund. I’ve wanted to get rid of that for a long time. I have nothing good to say about tech funds or technology stocks in general. History has proved time and time again that they are nothing but trouble. I will probably also sell TD CDN Equity which has had a good run and did not perform as well in the previous bear market as did TD Dividend Growth or TD Blue-chip Equity.

I do not have access to the original article, but here is part of what The Big Picture quoted:

The disquieting overwhelming agreement among Street folk that we’re in a rally mode whose only real danger is that of missing out on the fun and profit that lie ahead is not the sole reason for our skepticism. The inevitable speculative excess that such an attitude begets is another tangible cause for unease. Speculation, of course, is always with us. And thank heavens it is, since it’s truly a vital investment ingredient, adding spice and whetting appetites. Heck, without speculation, Wall Street would be the epitome of dullness. But it’s the classic good thing that you can quickly and easily get too much of.

And whether you feel we’ve reached that state depends mostly, we reckon, on whether you own a stock that’s kicking up its speculative heels or not. What is clear, however, is that there’s no shortage of such stocks and their numbers do seem to be steadily rising. Here, we suspect the revived passion for momentum investing, the opportunistic approach of many hedge-fund managers, reminiscent of the day traders in the late ‘Nineties, to buy anything that moves, and the hyperventilating habitués of the online chat rooms are major stimulants

. . .

Stepping back a ways to get a little broader perspective, it seems to us that we are witnessing the beginnings of the end of the fabled era of easy money. And anyway you slice it, that shapes up as not exactly good news for a lot of businesses that battened rich in that extraordinary era

I do NOT listen to this kind of stuff. I do not buy in to any predictions about what the stock market is going to do next as it is completely unpredictable. I like to have a balanced asset allocation and rebalance from time to time. Predictions like these are not anything to be taken seriously or to lose sleep over; they are only a reminder that it is wise to not be 100% in equities.

Time for Change

Recently, my wife and I have been severely punished for not carrying around change:

  • In October when we arrived in Maui, I lost my wallet (don’t ask). We made 4 calls from a payphone to 2 of my relatives in Canada to see if I had left the wallet at their house, or our house, the previous night. When we saw our credit card statement a couple weeks ago, we saw that we owed about $15.58 CAD for each call, $46.74 in total. Had we had plenty of US quarters on hand, I am sure our calls would not cost this much. Another idea would have been to buy a pre-paid phone card.
  • Recently my wife got a $50 parking ticket because she only had enough change in her wallet for half the time she needed to park for. The machine unfortunately did not take credit card and there was no teller who could take cash. A backup stash of loonies in the glove compartment would have come in handy.
  • I checked my accounts in gnucash for the keywords “bell” and “telus” and found a slew of payphone credit card charges. If I go back a year, it’s quite a bit. I’ve gotten so used to the convenience of swiping my credit card in payphones. I’m so hooked (and I never have any change on me), so I always look for the machine with the swiper.

I think I need to get one of those keychains that can hold two quarters, although the fact that we both have cell phones now should prevent these silly charges (too bad we didn’t bring them to Maui). If I get around to it, I think I’ll stick a roll of quarters and loonies in the glove compartment for “emergencies” such as meter parking. I park at meters so many times without paying it’s a wonder I haven’t been ticketed more.

Ottawa announces new policy on income trusts

The CBC reports that Ottawa has announced new policy on popular income trusts:

On the eve of an anticipated federal election, the governing Liberals announced new tax guidelines Wednesday that make dividends more attractive for investors but leave tax policy on income trusts unchanged. . . . The federal changes . . . would reduce personal income taxes on dividends, which the Finance Department says will help level the playing field between corporations and income trusts.

Note that it says they are only reducing personal income taxes on dividends, which was made more clear later in the article where Monte Solberg, Conservative finance critic is quoted as saying “pension plans will not benefit by this tax break that will go to individual investors.” The article continues:

The tax reduction will take the form of an enhanced dividend “gross-up” and tax credit to make the total tax on dividends received from large Canadian corporations more comparable to the tax paid on distributions of income trusts, and to eliminate the “double taxation” of dividends at the federal level.

The article also provides some important warnings about income trust that should be heeded:

A study released Wednesday says that despite the recent bloodbath in income trusts, the sector may still be overvalued by 28 per cent, or $20 billion. ‘Much of the overvaluation stems from abuses in the financial reporting, valuation and marketing of business trusts,’ concludes Accountability Research Corp., an affiliate of Rosen and Associates forensic accountants. . . . The study says the tax advantage of the trust structure has been overstated as the motivation for the mass conversion into trusts of corporations outside the energy and real estate sectors. ‘Rather, it has been the opportunity for selling owners to receive inflated prices well above what strategic industry buyers and professional investors alone would be willing to pay. Investment bankers have been motivated by the $1.4 billion of inflated underwriting fees that they have received since Jan. 1, 2001. Many have taken advantage of ill-informed investors seeking higher cash-yielding investments.’

This came as no surprise to me, as it was something my advisor told me about a while back. And one further blow to the non-energy, non-real-estate trusts:

Accountability Research said its examination of the 50 biggest income trusts outside the energy and real estate industries found that less than two-thirds of their cash distributions are actual income. The rest is a return of investors’ own capital.

Welcome to the new site!

Welcome to the new and improved Investing Intelligently, no longer hosted on Blogspot.com, but hosted on a server using WordPress. Feedburner has been updated with the new feed, so if you are subscribed through Feedburner you should be fine.

I am still trying to get the hang of WordPress (so far I love it). I may change the theme (the only reason I am using this theme is because it is the default) soon and will also add all my links back to the sidebar or perhaps just my bloglines.com blogroll.

DRIPs for iUnits ETFs

As a follow-up to my previous post where I quoted a site that said ETF distributions could only be paid out in cash, I just found out from a comment on the canadiancapitalist.com that it is possible to have distributions from iUnits ETFs re-invested through a DRIP:

Dividend reinvestment plans let you take advantage of the power of compounding. Instead of receiving cash dividends from the company, you may purchase more of a company’s stock by having the dividends reinvested. Your brokerage firm may offer a dividend reinvestment plan that allows for the reinvestment of cash distributions on iUnits. Cash distributions, in the form of income, return of capital or dividends could then be reinvested in additional units of the same fund. You should check with your brokerage firm to see whether you will be charged for this service.

iUnits (Barclays) lists four companies which offer DRIPs for iUnits, three of which are Canadian big-bank brokerage affiliates. The one that wasn’t, Canadian ShareOwner Investments Inc. states “to enjoy complete dividend reinvestment and the lowest trading commissions in Canada, your iUnits need to be in an account at ShareOwner.”

The iUnits.com website goes on to say that “as demand increases, more firms will likely have DRIPS available on iUnits.”

I still can not see a huge advantage to DRIPs, except that using them would reduce the cash-drag in an investor’s account ever so slightly. I recently talked to my advisor about cash distributions the ETF I will be buying soon and our plan will be just to roll the cash into my regular monthly purchases within my RRSP.