Should I Go It Alone?

Over the past year I have been an advocate for using an advisor as a source of some good advice and as a way to keep a small barrier between you and your money, to prevent over-active trading. Frustrated by the fact that Clearsight Wellington West, after getting rid of my former investment advisor, has not bothered to call me, and unimpressed by what I see on the web pages of investment management companies, I have been contemplating going it alone. The main reason I got a financial advisor was to stop me from doing stupid things and that worked. It was also done to save myself time. But if I don’t do stupid things and stop trying to be too active with my money, then it should not take too much time. Having an advisor for the past year was a great experience. Over the year we never sold a single investment. I don’t think I ever went a year before without at selling a mutual fund at some point. Am I ready to go it alone? I don’t know, anyways, it is just an idea at this point.

After my unsuccessful search for an investment management company, I briefly looked at options for self-directed RRSP accounts. I first looked at TD Waterhouse (I used to be at TD Waterhouse and TD EasyWeb) because I really like their web services. I also looked at E-Trade. Their trades are a bit cheaper at $20. My portfolio as it stands right now mostly consists of a bond mutual fund, a Canadian ETF, a Canadian small-cap mutual fund, a US mutual fund, and an international mutual fund. I might switch the US component to an ETF and leave the CDN small-cap and international where they are for the time being. If after the transfer is all done from Clearsight to E-Trade and I buy 1 ETF, if all I have to pay is $20 then that is pretty good. It looks like their have some conceirge account transfer thing so the transfer fee is waived if you have more than $25,000. I have that much but my wife doesn’t so I’ll have to think about what to do there.

Canadian RRSP Statistics

The Canadian Capitalist linked to a Stats Canada article about Canadians and their RRSP contributions. I found some of the results interesting:

“As in recent years, almost 86% of taxfilers were eligible to contribute for the 2005 tax year. Of these, about 31% actually made contributions.” – This makes me feel glad about our situation, that we are certainly in that 31% minority, but it is a bit disturbing that the vast majority of people (69%) did not make an RRSP contribution. What does this say about our education system? There is not a single mandatory high school course in B.C. that teaches students about RRSPs (or anything financial related) yet it is mandatory to take all sorts of other useless (relatively-speaking) courses.

The median contribution from Vancouverites was $3,160. I am proud of the fact that we are contributing almost double that amount per person (effectively maxing out our contributions), while definitely not making double Vancouver’s median income. It is going to be a challenge next year as our effective income in 2006 has increased significantly since my wife worked for all of 2006 (compared to half of 2005) but we are committed to contributing our 18% which should be easily achievable just by reducing our loan payments. Overall in Canada taxfilers contributed $30.6 billion, which represents “only about 7% of the total room available to eligible taxfilers.” I think the reason that is so low is because of the 31% statistic above. At least I think that the 7% is including all taxfilers, including those who did not contribute at all.

Still no Word from Clearsight Wellington West

Since Clearsight was bought by Wellington West about 1 month ago as I described I have not heard from my new financial advisor (as my original advisor “will no longer be with Clearsight” as a consequence of the acquisition). I decided to wait for them to call, to see how bad they wanted me. Well it appears that I am not that important to them. I did receive an email and a letter in the mail, which was appreciated, but no phone call. I thought they would have made phone calls to everyone ASAP. Anyways, I am just saying that I am disapointed and that this will influence my decision on whether or not I stay with them, follow my former investor wherever he sets up shop, or start searching for a new place altogether.

Some Bad Advice on ETFs and Mutual Funds

Just read an extremely shoddy article in a financial management company publication called “Understanding protected products and index funds.” (see page 7-8). It’s about ETFs, and here’s how it goes:

“Exchange-traded funds (ETFs) are mutual funds traded on a major stock exchange, such as the TSX. The investment strategy for each ETF is to align with a particular stock or sector index, such as the S&P/TSX Composite or one of its sub-sectors. Investments in each fund mirror the same proportions as the index that the particular fund tracks. This strategy is known as passive management or indexing.”

Well this introduction to ETFs is not stellar to say the least, but if directed at a very introductory audience, could be considered satisfactory. It is not true that all ETFs are passive, nor is it true that all ETFs “align” with an index (by market cap), but most are, so close enough. Here’s where it gets kind of crazy:

ETFs are perceived to offer three main advantages. First, since the funds are traded on exchanges, trading is done in real-time.

You stated a fact, but why is that an advantage? Actually it isn’t. How many people (by people I mean investors not speculators) out there are day-trading with ETFs? How many people should be concerned about the weekly, let alone daily activity of the market? How many people should be concerned about whether the security they buy has its price updated in real-time, or every night? The answer to all the questions is ZERO.

Second, ETF values rise (or fall) as the index rises (or falls).

Another fact but why is it an advantage? Was this article written by a 12-year old blogger? The fact that an ETF tracks an index is not an advantage IN ITSELF. So I guess having something that tracks an index is advantageous over something that doesn’t track an index… if what you want to do is track an index? I’m not even going to try to understand what is meant here.

Third, management expense ratios (MERs) are usually lower than the MERs for actively managed mutual funds.

Yes, ETFs can have lower MERs than actively managed mutual funds; however, is that really an apples-to-apples comparison? Sure actively managed mutual fund MERs are high (>2 or 3%). What about passively-managed mutual funds, like an index mutual fund? The Altamira index funds have MERs of 0.54%, at least for the Canadian Index Fund. Last time I checked iShares’ XIC ETF had an MER of 0.25% which is close and don’t forget that you have to pay your trading costs every time you buy and sell it. Anyways, what they were trying to do with advantage #3 was say that MERs are lower for ETFs, which in general, they are, which is the main advantage of ETFs (but don’t forget the commissions) over their competitors. Here’s where it gets really crazy (I mean wacko):

The primary disadvantage of ETFs is their inability to outperform the index.

This seems to conflict with the above advantage that the ETF value “rises (or falls) as the index rises (or falls)”? If it is a primary disadvantage that it can’t outperform an index shouldn’t it also be a disadvantage that is tracks the index? He/she does add that “on rare occasions, an ETF may slightly outperform its benchmark level–a phenomenon known as ‘tracking error'” which again is incorrect. Tracking error is defined as the total error between the index and the index-tracking ETF. Due to MERs it would be almost impossible for your tracking error to be positive except by some crazy fluke of timing. But let’s get back to the statement that “The primary disadvantage of ETFs is their inability to outperform the index.” Well this isn’t really a disadvantage as an ETFs goal is to track an index (modulo those tracking errors) not outperform it. So they must be referring to this as a disadvantage compared to some other financial instrument, which CAN outperform the index. With more risk though right? Nah, with less, because “in fact, investors assume additional risk [with ETFs] because passive managers are unable to take action to outperform the index or to protect the fund during a market decline.” What are these magical investments that can outperform index with less risk than an ETF. Fund managers to the rescue!

On the other hand, a mutual fund manager has the ability to surpass benchmarks – thereby strengthening a portfolio in the event of a market downturn. In other words, while investors can ride the index up, they will also ride it down with no protection from the fall-out.

A mutual fund manager has the theoretical ability to surpass benchmarks, but this ability is rarely manifested in the real world. We have been told countless times about the inability of the majority of mutual funds to beat their corresponding index benchmarks. It is difficult for fund managers to protect their investors from the “fall-out” anymore than a passive index. If it were easy, well, everyone would be in mutual funds. No one is inherently more “protected from the fall-out” with either a passive index ETF or an actively managed mutual fund. Finally,

Also, the low MER on ETFs may be deceiving. Most ETFs are bought through fee-based advisors who will add an annual asset allocation fee to their client portfolio, which in turn can significantly reduce the performance of these passive investments. Fund performance reporting services . . . do not take these fees into account when reporting the performance of these products. When these costs are factored in, ETFs are as expensive as some of the more actively managed funds.

This paragraph sounds like complete rubbish to me. I have an ETF in my portfolio as well as mutual funds. I pay nothing extra on top of the MER, just the commission to buy the ETF. I don’t think the situation would be much different if I had a fee-based portfolio.

Not surprisingly, the author of this embarrassment’s name is not given. Page 3 of the magazine reads “the material in Strategy, while obtained from sources believed to be reliable, is for information purposes only.” If only it were 2-ply, it could serve a more useful purpose.

Upgraded to WordPress 2.0.5

I just upgraded to WordPress 2.0.5 today. So far so good. While I was at it, I disabled the siFR stuff that gave me fancy headings (provided by the CG-FlashyTitles plugin). It was slowing page-loading time down a lot. I had always noticed the slowdown but didn’t bother to measure it until now. In some cases disabling brought the page-load time down to 5 seconds from 10 seconds. I also disabled the Visual.SpellCheck because Firefox 2.0 has built in spell-checking for text boxes.

Resist the New TV Cravings

Earlier this year we almost spent over $1000 on a new TV. I am so glad that we resisted, as 2 weeks ago, we stopped watching so much TV. We started setting a limit of 1 hour at most per day combined for the two of us because we noticed we were watching way too much TV and not getting enough other things done each day. Now we barely watch TV at all, and don’t always use up the 1 hour per day allotment. The pressure to buy a big TV is huge. It seems that so many people are buying bigger and bigger TVs these days (size apparently does matter). One of the reasons that we had the temptation to buy it was because we had bunch of money sitting in an ING account. We have since starting paying down the principal of our student loans, instead of just the interest so we no longer have gobs of cash sitting in our ING accounts. We could not afford to pay down the principal of the loan before, but after a couple raises some adjustments to our monthly cash flow, we are able to pay even on the principal that we owe in interest. This is helping to keep our cravings for new expensive things at bay, and helping us slowly reduce the amount of interested owed monthly.