making investment simple and creative
In last week’s The Economist magazine, there was a great Vanguard advertisement. Just look at how simple (and zen) and how great the use the design is to convey the message. (sorry if the picture is poor quality)
As much as I like the world of finance and investment, I have to admit that finance can be a very dry subject when it comes to visual and this advertisement just is proving that it possible to have a great well design finance advertisement.
Paul Farrell – Brainwashing 10: How Wall Street is screwing you up
Set it and forget it Following the financial news doesn’t mean you have to trade on it
4 stocks benjamin Graham would have loved:
Economist “Falling Short” on Defined Benefit and Define Contribution Plan
Important to stay constant with your investment philosophy
Stocks: The Power of PEG
P/S ratio ain’t so bad afterall
Couple of weeks ago I read an a newspaper article on the fact that many pension funds in Canada had
problems in the past year just to match their benchmark and due to their cost of management, many companies are renouncing to Defined Benefit Plan (DBP) to Defined Contribution Plan(DCP).
**Recap on DBP**
Example: A typical DB plan determines the employee’s benefit as a function of both years of service and wage history. As a representative plan, consider one in which the employee receives retirement income equal to 1 percent of final salary multiplied by the number of years of service. Thus, an employee retiring after 40 years of service with a final salary of $15,000 per year would receive a retirement benefit of 40 percent of $15,000 or $6,000 per year.
**Recap on DBC**
Example: Quite simple, each year your employer gives you a regular $$ contribution; which you can also add more cash, the employee can invest via a financial institution affiliated with the company and the employee is bearing all the risk of his investment choices.
In this week’s Economist, a great article was written on a major problem that Retirees will face: Retire with not enough cash in saved from the previous years. If you look in the graph below, you can see that DBP are just going down the drain for DCP.
Because employees are the one mostly responsible to see if the regular amount that they are saving will meet the needs for the retirement purposes, many are having problems to estimate the amount they will need to live during their retirement. Also, some are just simply not good to do regular savings (with DBP it was all covered by the employer) and they just spend, spend, spend. Furthermore, many reinvest their savings in their own companies and some are just getting screwed like Enron’s case.
The main problem I see is the lack of knowledge investors/employees have when it comes to invest their savings. In what should they invest? Which assets? How should they allocate? and that was my dad’s issue with is DCP. He had is cash invested in mutual funds that was charging 2.6% MER!!!!!! Employee’s will get screwed by those big MER and have problems to meet their retirement saving needs. However, I was able to help my dad to do a great Passive Index allocations with Barclays’ funds.
From the great book Dick Davis’ Dividend by Dick Davis; here’s the best way to describe the market:
“Like a boxer, the investor’s first step toward winning is knowing what to expect from his adversary…. He should know that the market goes to extremes in both directions, that it can be both the supportive, caring, seductive lover and the cruel, cold, insidious antagonist; that it can cause euphoria and exhilaration or anger, fear and despair. He should know that the market can change its mood on a dime; that it can be capricious, enigmatic, and ornery; and that mostly it can be dull, listless, and boring.”
Just simply well said… I wanted to share it with more people.
“Charles, suggest me a good investment strategy for my future retirement while I am still young”
- Well I do have a very good investment strategy for you buddy, there’s nothing better available for small investors like us than having a great indexing portfolio”
“Indexing portfolio… what is that?”
- It’s actually the simplest for of investment around that invest in the broad market(s) and I can guarantee you long-run returns that will at least beat 80% fund manager that you have access. So basically, you can buy a mutual fund(s) or ETFs that will mimic a broad market return as such as stocks (S&P, Total US Market, International EX. US, Canadian Market, etc…), bonds (Short/Long Term, TIPS, etc…), and specialty sectors like REITS.
“The broad market? Didn’t the market did poorly since the beginning of the credit crisis? I don’t want THAT!! If I would have listen to you prior to the credit crisis I would have lost tons of cash!!!”
- Wait a minute!!! Calm down buddy… listen carefully. First, it is true that the market is not performing very well in the last year or so but do you know an investor that is available to you that actually did better than the market? If you do, did you take into account its fees (MER) and turnover ratio? If you don’t know, do you realize how small are the chances for you to end up on a well backed-up, documented and professional manager that did better than the market on a long-period of time (i.e. 15 years)? And don’t forget, not all your cash is tied up in bonds, we need to properly allocate your cash in different assets to maximize your return with the lowest possible risk as possible. Also, index funds or ETFs have the lowest management fees you can ask. Even Warren Buffett agrees on indexing:
By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb
- According to Paul Farrell, in a February 4, 2006, MarketWatch.com said:
The S&P 500 beat 97% percent of mutual fund managers for a 10-year period ending October 2004. In two 30-year studies, the S&P 500 outperformed 97 percent and 94 percent of the angers. And only 12 percent of the top 100 managers repeated
- Not convince?
“… so tell me which stock should I buy, I was interested in this new hi-tech firm that came out lately and its price has sky-rocket like crazy!”
- ………………..
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This is a brief, not in detail type of conversation that I have, again with friends (and yes my dad) on indexing. Some are just simply afraid of the word “market”. Maybe because everyday they can hear stuff like “the market lost 400 points today, the market is very volatile” that scares a lot of investors about indexing. Maybe instead of saying “investing in the broad market” we should say “the market that outshine must portfolio managers”.
quick note: However, that depending on how much money you have, you can have access to best portfolio manager that can outperform the market on a long-run period but I believe that these good managers are only available to rich people.
quick note: Which market are we talking about when we say “beating the market”?
UPDATE:
This morning I found a great blog where the blogger had the opportunity to ask a question to Warren Buffett at its annual Berkshire Hathaway “capitalist woodstock” great convention:
“If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage.”
Buffett let out a small laugh and began. “I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work…”
So why is yourself the worst friend you can have when you want to invest? Well, if you are someone who, let’s say, who is very emotional you can bet that you will buy or sell at the wrong time because of your emotions. Also, investor’s behaviors is sometime just madly insane… many thinks they are smarter than the market!!! Unless, you have studied finance at school/University and/or that you have proven over a good period of time that you are a good stock picker, you must bow to the market. Investors are excellent to scrap their money on bad “emotional” purchase or selling. Also, someone who falls in love with their stocks or a certain industry is a trap. When you fall in love, you becoming blind of your move in the market and you believe that all your moves can only go right. Therefore, bow to the market.
“Always put emotion aside and keep your relationship with your portfolio platonic”
- Stephen Jarislowsky
Your best friend: The long-run, time, long period of times. If you take a look at the Dow Jones Performance since 1930’s you can see that it went up, by a lot! That only means that bull periods lasted longer than bear periods. So, if your an indexer believer, then you know that you will be a winner over the long-run guarentee. But what is long-run? At least 10-15years. If you buy a stock, don’t sell it as soon as it goes down, even if it really goes down, time should get you to break even or win. Not all stock are long-run winners but the belief of the long-run effect is how you make your money in the stock market (think about Warren buffett for instance). Sell only if you quickly realize that you have done a mistake.
This Idea is taken from the great great book “Dick Davis Dividend” by Dick Davis“.
“So where is the stock market going this year Charles?”
- I don’t know.
“How come you don’t know? Aren’t you suppose to be one of the top finance student at your University?”
- What do you mean by top? I just have good grades but that doesn’t mean I know where the market will go this year or next year… actually no one can!
“How come no one can?’
- Do you know anyone who actually can predict where the market is going on a constant basis?
“Well I thought someone could because of all the news on TV, etc… I mean those stock specialist sounds so smart no?”
- Well they have to sound smart, otherwise no pay check! I could give you tons of reason why the market will go up or down by the end of the year.
“No but what do you think?”
- I still don’t know…
“I am confuse”
- PERFECT! Now you understand the market!
“What do you mean?”
- You are CONFUSE! That’s the hole point… the market is simply a weird non-sense confusing thing !
“I still don’t get it…”
- good.
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That famous conversation, I have it with my dad, family, and some school friends a couple of time. Everyone has to realize that no one can predict the market and where it will be by the end of year or next year or in 3-4 years. There are 2 types of Stock Market Specialist. There are some who don’t know where the market will go and those who haven’t realize yet that they don’t know where the market will go. Simple no? Not really because it goes against human nature for not knowing something. Humans seemed to be program to find trends where there are actually none.
But why is the market really confusing? I could go in deep details but I won’t. Simply ask yourself “What is the market? or Who is the market?” Us, population of the world is forming the market and since humans often act in manners that are so unpredictable, how can we predict the market? Get it?
However, there’s something for sure I can say about “predicting” the market, if you actually can call this a market prediction. In the past, Bull markets are followed by Bears but Bull periods tend to last longer than Bears… there you go! Now everyone understand the stock market? Simple no?
Are we or not in Recession? The NBER revised the previous GDP growth from .6 to .9% and today that boost
stock markets. If we would have bought the majority idea of active investor we would have place all of our money in TBILLS or Bonds (But rates are low) to protect against market downturns and today the market went back up fast… but for how long? Probably for a short time… if oil prices and more banks declaring debt write-offs… and food prices… I still believe that this U.S. market slowdown will last for a long time.
In Canada the stock market as broke a new record of more than 15000 points… due to energy prices, Research in Motion and Potash…
But all these ups and downs scares me a little… One of my Finance teacher, who’s a Bond Portfolio during the day said that in November, after the U.S. election, the “crap will hit the fan”!
Market downturns or recessions depresses a lot of investors but not for me… its time to make good purchases at low cost. Great non-cyclical stocks are cheaper than usual… or financial institution 
Want to invest in China but you are not sure if it fits your thirst of risk and your portfolio characteristics?
Burton Malkiel, professor at Princeton University did a great (but not super entertaining) presentation at Google earlier last year about investing in China. Burton Malkiel is the guy behind “Random Walk Down Wall Street” which is to me, one of the most important investment book every investor should read. When I first started my finance courses, I read “Random Walk to Investing”, which is a small version of “Random Walk Down Wall Street” and an easier read for anyone who has basic or no knowledge in investing. Burton Malkiel was the first one to back-up the benefits of indexing with John Bogle.
To get back to China, many investors are wondering if they should invest in China. According to Burton Malkiel, you should if you are willing to take the risk. Malkiel says that you can expect not much more than 7 to 8% in U.S. equities in the years to come and 11 to 12% in China (based on the Gordon Model).
There are 3 factors for such a good equity return in China:
The main risks in the Chinese Economy are:
Please watch this 1 hour long presentation if you are interested to invest in China. You will gain a lot of knowledge about how you should invest, etc… It is a must
