December 2003

We spend the year accumulating wealth. Now is a good time to share it with those who are less fortunate. Make an online donation to any of Canada's 80,000 registered charities. Get a tax receipt immediately. Services are provided at no cost to either charity or donor. Do you know what your money pays for? • charityrank.ca

Irrational Optimism [SSRN, Dec03] "Although the probable rewards from equity investment are attractive, stocks did not and cannot offer a guaranteed superior performance over the investment horizon of most investors. Furthermore, their prospective returns are lower than many investors project, whereas their risk is higher than many investors appreciate. Investors who assume that favorable equity returns can be relied on in the long term or that stocks are safe so long as they are held for 20 years are optimists. Their optimism is irrational."

You only pay twice [Globe&Mail, 29Dec03] "Soft-dollar deals between brokers and fund managers are under fire south of the border. Why not here?... Investment companies will argue that soft dollars help keep MERs down, but who's kidding whom? Fees generally go one way in this business--up, up, up."

Does It Pay to Invest Little by Little? [Wall Street Journal, 21Dec03] [Search for "clements", then select Dec. 21 article.] "Indeed, dollar-cost averaging allows us to face market swings with far greater equanimity. When the market goes up, we feel richer. When it goes down, we have the comfort of knowing our next investment will buy shares at a cheaper price. 'It is the psychological solace that counts in dollar-cost averaging,' Prof. Statman says. 'It is about self-control and shedding responsibility.'"

Sadly, lawsuits are best remedy for investors [Globe&Mail, 16Dec03] "Advocis believes it's best equipped to supervise advisers, and maybe it is. But let's not pretend that investor complaints are ever going to get a proper hearing from a self-regulating organization. Inevitably, groups like this analyze complaints in terms of legalistic rule interpretations and not basic questions of ethics and fiduciary duty."

Giving is still sound tax policy [Financial Post, 13Dec03] Several ways to save income tax when you make a charitable donation.

Mutual funds or hole in the ground? [Globe&Mail, 11Dec03] "In fact, the real scandal in the mutual-funds industry isn't the cheating and stealing. It's the shilling, the hyping, and the shameless lack of truth in advertising. It's also the fabulous and entirely legal rake-offs. Every year, investors fork over about $70-billion in fees, and 40 to 45 per cent of that is profit to the managers. Which helps explain why they live in Rosedale mansions, and you don't. John Bogle, the venerated founder of the Vanguard Group, says that of all the money the industry takes in, only $4-billion or $5-billion goes to actual investment management."

Hot-Box Growers Income Fund IPO [Hot-Box Growers, Dec03] The income trust mania is reaching new highs. Be careful that you don't get burned when the market goes to pot. "The Company will use the net proceeds of the Offering, together with the New Credit Facilities, to purchase an interest in the greenhouse businesses operated by the cannabis community and to pay off local police forces to maintain a positive, uninterrupted cash flow."

November 2003

Understanding the Tax Implications of Exchange Traded Funds [Barclay's Canada, Nov03] This newly-revised edition provides information about taxation of US and other foreign ETFs under CCRA's Foreign Investment Entity (FIE) rules as well as the US estate tax implications for Canadian owners of US ETFs.

Conquering that mountain of debt starts with a pencil [Globe&Mail, 29Nov03] "It's simple: You look after the pennies, the dollars look after themselves. After 18 years of carrying loans, Laura Lawton can't believe she's finally debt-free... While Ms. Lawton may have jumped off the debt treadmill, there are still plenty of Canadians spinning their wheels in the red."

Be wary of fees charged by financial advisers, fund managers [Montreal Gazette, 29Nov03] "People spend inordinate amounts of money on financial advice. They're afraid of the financial markets and don't understand them. If they did, they wouldn't pay what they do... [Active fund managers are] all there telling you how great they are. The temptation is always to ask them if they'd refund their fees in the future if they don't do as well as the index. You'll never hear any of them agree to that."

The Greed Disease [Scott Burns, 25Nov03] "Yes, I know there are good people in financial services... Unfortunately, the good people don't wear badges. Still worse, they may be 'good people,' but they haven't lifted a finger or raised their voices. At best, they just did their thing. When was the last brokers' revolt against corrupt management?... There is only one answer: They didn't care about their customers. They cared about their jobs and compensation more. We should behave accordingly."

Ottawa eyes charitable tax shelter [Financial Post, 25Nov03] "As the year-end tax shelter season goes into overdrive, Ottawa's tax collectors are about to issue a stern warning to investors considering arrangements based on charitable donations or "gifting." A fact sheet to be posted tomorrow on the Web site of the Canada Customs and Revenue Agency makes it clear anyone involved in gifting arrangements where tax benefits exceed the actual cost of the donations can expect trouble."

Bylo rebuts  Index-fund pros and cons (and con jobs?) [Globe and Mail, 25Nov03] "If you choose wisely, active managers can outperform the indexes over time." If it's so simple, then why doesn't everyone do it?

Break the poverty mentality for a good cause [Globe&Mail, 22Nov03] "If you remain trapped by your insecurity about letting go of your money, you'll never truly enjoy the freedom that comes with greater wealth. Who do you think knows greater freedom in life: The person who hoards his money because he's concerned about having enough, or the person who gives generously because he recognizes that he has plenty?"

Spitzer targets mutual fund fees [Globe&Mail, 22Nov03] "New York State Attorney-General Eliot Spitzer is promising to force mutual fund companies to reduce their management fees, which, he said, are 'grossly out of control.' Mr. Spitzer -- who has led the crackdown on improper trading practices by mutual funds -- said the huge rise in fees over the past several years has cost investors far more than the trading abuses he and other regulators have exposed."

Shock doctor stirs worrisome pension pot [Toronto Star, 22Nov03] "Hamilton wants a new pension deal, one that provides for workers and retirees better than the 'usurious' mutual fund industry without putting the future of companies at risk. You can't have good pensions without strong employers. He's just getting tired of the legal obstacles that scare employers away from offering decent pensions and weaken those that do." See also The horse is dead [Financial Post, 21Nov03] "Someone, somewhere, needs to do something about the legal framework for defined benefit pension plans." and Tell it like it is [Financial Post, 22Nov03] "The time has come to change the way we design corporate pension plans, and here are seven concrete suggestions to help employers reduce their risk."

Broken trust [NY Times, 20Nov03] "The 'world's largest skimming operation' is how Peter Fitzgerald, a republican senator from Illinois, described the US mutual fund industry at a recent Senate hearing into abusive trading practices. It was, he added, a $7,000bn 'trough from which fund managers, brokers and other insiders are steadily siphoning off an excessive slice of the nation's household, college and retirement savings'."

Journal of Indexes • 4th Quarter 2003 [Nov03] Articles include, Enhanced Or Active?, Guaranteed Enhanced Indexing, Tracking The Real Market, Intelligent Indexes, How Is Your Reconstitution?, Bogle´s Corner and The Curmudgeon.

Joined at the Hip – Vanguard’s VIPERS and index funds [IndexUniverse.com, 11Nov03] "Vanguard's exchange-traded funds are structured as separate share classes of its exisiting index funds. Industry insiders debate the merits of this structure vs. 'stand alone' ETFs." See also: New Vanguard Vipers Put A New Twist On ETFs With Separate Share Classes

'Inexcusable' [MSNBC, 06Nov03] "In the mid 1990s, John Bogle, founder and former CEO of the mutual firm, The Vanguard Group, warned of disturbing trends he’d noticed within the mutual fund industry... At the time, no one paid him much heed. But they’re listening now... 'I don’t feel any vindication now, but I do feel that out of all this is going to come tremendous good. This will be bad for the industry, in the colloquial sense we use that, but very good for investors. The spotlight is shining on the areas that are really important in conflicts of interest between managers and fund shareholders.'"

ETF Liquidity Myth Dispelled [ETFZone, 06Nov03] "Some investors appear to believe that the liquidity of an ETF is dependent on the fund's average trading volume, or the number of shares traded per day. However, this is not the case. Rather, a better measure of ETF liquidity is the liquidity of the underlying stocks in the index."

Bigger fund ripoffs exist than illegal trading [Globe&Mail, 06Nov03] "The fund business is rife with examples of managers who collect rich fees for doing little research and using even less imagination. Mutual funds get a lot of bad press for their high fees, and deservedly so, but in some cases that's not the issue; it's how little investors are getting for their money. Mr. Spitzer and Mr. Brown can spend all the time they want looking for illegal trading activity in funds, and they should. But bigger, legal ripoffs are easier to find."

Nobody sues in a bull market [Financial Post, 06Nov03] "Brokers tend to be called rogues while I have through the years defended advisors and met an array of rogue clients who are willing to say whatever it takes to get their money back."

How Scandal Can Help the Mutual Fund Industry [NY Times, 02Nov03] "The great thing about these scandals is that they have not only illuminated market timing, but also the heavy fees and marketing drive to bring out funds in the interests of managers, not investors... But the mutual fund is the greatest instrument for long-term investors in the mind of man."

74-year-old widow's case just drags on [Toronto Star, 02Nov03] "The 74-year-old Mississauga widow has been let down, on two counts. First, she was advised three years ago to switch to a very aggressive mix of funds for her age and risk tolerance. Secondly, she feels she is "going up against a brick wall" in trying to get compensation for her estimated losses of more than $100,000."

October 2003

The Invention Of Inflation-Indexed Bonds In Early America [Cowles Foundation, Oct03] "The world’s first known inflation-indexed bonds were issued by the Commonwealth of Massachusetts in 1780 during the Revolutionary War. These bonds were invented to deal with severe wartime inflation and with angry discontent among soldiers in the U.S. Army with the decline in purchasing power of their pay."

Clients can be greedy too [Financial Post, 30Oct03] "an out-of-court partial settlement with a disgruntled client isn't in and of itself an admission an advisor did something wrong. Yes, Virginia, clients can be greedy and stupid too."

Still waiting for lower fund fees [Financial Post, 28Oct03] "Criticism of high MERs has been more heated since the bull market morphed into a bear... Problem is, when funds lose money, they still deduct MERs. So a fund which broke even before fees ends up losing 3%... The logic of ASL customers is simple. Trailer fee rebates equals lower MERs equals better performance."

How the Mutual Fund Scandals Will Serve Fund Owners [BFMRC, 27Oct03] "When I conclude my remarks today, I hope that you’ll have a better understanding of what today’s mutual fund industry is all about—that you’ll see our industry as it is, and not as virtually every industry leader sees it. The gift, in the words of Robert Burns, 'to see ourselves as others see us.'" See also John Bogle Applauds Moves To Reform Funds [Investor's Business Daily, 05Dec03].

Fund fees soar over three years [Financial Post, 27Oct03] "The management and operating expenses of many Canadian mutual funds have risen steadily over the past three years, gobbling up an increasing proportion of fund assets and crimping investor returns... 'Investors may be surprised that the saying, "you get what you pay for," applies to most things -- but not always to mutual funds.'"

Heeding advice of an elder [Dallas Morning News, 25Oct03] "Today, I've come to ask what advice [Bogle] would give to people about to retire...First, look at all of your assets. The most important thing is asset allocation – how much is in equity and how much is in bonds... You want to put yourself in a position that you will never respond to the financial markets. There should be no need to slavishly reallocate. You should be able to relax."

Understanding Investment Performance (Part Two) [PH&N, Oct03] "End-date bias...illustrates that the commonly used reporting periods for investment performance - one year, five years, ten years, etc. - are arbitrary (that is, they are used because they are 'nice, round numbers'). In the end, any reporting period is nothing more or less than a snapshot with defined borders." See also: Understanding Investment Performance (Part One) for basic comments and terminology.

Time to chuck commissions? [Globe&Mail, 25Oct03] "A growing trend toward fee-based financial advice has both benefits and pitfalls for investors... If you're searching for a financial adviser, remember that there are good people who work on a commission basis, and hacks that have glommed onto the fee-based model because they see it as a gravy train. The character, experience and style of the adviser matter just as much as the style in which he or she is paid."

Secrets Of Success: Investment professionals? No, just profit-hunters [The Independent, 25Oct03] "The most important decisions - deciding what you are trying to achieve with your investment programme and picking the right asset mix - may benefit from advice but they do not need changing very often, and to the extent that you can do it yourself it ís 'near on dirt cheap.' So for most of us the winner's game is 'to find the right long-term purpose and find the right means by which it can be executed at the lowest cost.'"

Industry muzzles its victims [Financial Post, 23Oct03] "Gag orders keep bad advisors' names out of the press. One of the frustrations with this job is some of the most potentially instructive stories can't be made public. Since the stock bubble of 1999 burst, many tales of investor abuse involving leveraged loans have come to my attention." See also: The bad apple data base.

Indexing: New, Improved Newness [Bloomberg Wealth Manager, Oct03] "Once a steady-as-you-go approach to an untamable market, indexing now has Wall Street busy offering expensive imitations and some not-so-reasonable facsimiles... 'Wall street refines products to the point of absurdity.' Why? Pursuit of market share."

Financial advisers weave scary tales [Toronto Star, 15Oct03] "The question really is: Can you offer unbiased advice when you have a quota to meet or only earn money when you recommend a financial product from a select group you are required to sell? Even if you require everyone to become certified financial planners, horror stories will still exist if they are compensated on anything but a fee-only basis." See also: Certified advisers decry 'horror stories'

Squeezing Out Cash In Retirement [Wall Street Journal, 12Oct03] [On linked page search for "clements", then select Oct. 12 article.] "They save the toughest for last. Among the financial conundrums you'll face during a lifetime of investing, probably none is trickier than squeezing income out of a retirement portfolio." See also: The Retirement Calculator from Hell

Time to unhitch that trailer [Financial Post, 10Oct03] "ASL rebates trailer fees to customers...By 'taking back your broker's embedded compensation' over a lifetime of investing, fund buyers can end up with nest eggs 30% larger than they'd otherwise be, Leemhuis says."

Efficient Frontier • Fall 2003 [Oct03] Zvi Bodie and the Keynes' Paradox of Thrift (What if everyone became infatuated with inflation indexed bonds?), Signal, Noise, and Success ("the winners focus on the signal, the losers on the noise"), Bigger Than a Breadbox (a sneak peek at Dr Bill's latest opus.)

Smart Money [New Yorker, 06Oct03] A broad summary of current beliefs about "beating" the stock market. Yet, "for most people, the safest bet is to stick to index funds, and to further diversify with bonds, real estate, and foreign securities."

Fire your investment adviser? [ CBSMarketWatch, 02Oct03] "That's Burton Malkiel's 'basic point one,' his first step on the road to financial success in his new book, The Random Walk Guide to Investing, a mini-version of his million-copy best-seller A Random Walk Down Wall Street."

Investors should see where cash goes, despite cost [Globe&Mail, 02Oct03] "The fund industry has some concerns about dollar-and-cents fund fee disclosure, and that's fair. But so is telling people exactly what they're paying for a product."

September 2003

A professor does the math [Vanguard, 02Sep03] "Because the market is efficient over a long period of time, most investors should have the bulk of their assets in broadly-based index funds. You avoid the fees and the hype. Highly paid investment managers don't do better than index funds, on average, so why should Joe Q. think he can do better?"

The Man Who Knows Too Much [Business 2.0, Sep03] "Use common sense... Be conservative. A mix of 60% stocks and 40% bonds will work just fine for most investors. Or you can hold a low-cost balanced fund...ideally through index funds. Sounds simple enough, I say. Hardly, retorts Bernstein. In fact, this great self-taught investor doubts that most people will ever make good investors. Even though investing is not brain surgery. Even though it's just a matter of sticking to a basic plan. Four skills, Bernstein says, are absolutely essential for success."

Journal of Indexes • 3rd Quarter 2003 [Sep03] Articles include, The Wilshire 5000 Total Market Index, Hedge Fund Indexes, Index Pioneers - Burton Malkiel, Doing Right For Investors, and Fostering Prosperity.

August 2003

The World's Most Honest Money Manager Tells All [TheStreet.com, 27Aug03] "Of course, mutual fund managers aren't a dishonest lot in general -- most seem like fairly straightforward, conscientious people. But you won't find many skippers who readily concede that the industry is riddled with problems that make index funds look most appealing." See also: He's not picky--he'll take whatever is wounded.

The World's 'Safest' Investments Still Carry Risk of Painful Losses [Wall Street Journal, 27Aug03] [On linked page search for "clements", then select Aug. 27 article.] "Inflation-indexed Treasury bonds are possibly the market's safest investment. But you could still suffer stinging losses...The fact is, inflation bonds can post nasty short-term losses...Even if you can shrug off this volatility, you face a second headache. Every year, investors have to pay income taxes on both the yield they receive and the inflation-driven increase in their bonds' principal value."

TIPs and Broad Market Bond ETFs to Launch in Q4 [IndexFunds.com, 25Aug03] "The iShares Lehman U.S. Treasury Inflation Protected Securities Fund will track the Lehman Brothers U.S. Treasury Inflation Notes Index that measures the performance of inflation protected public obligations of the U.S. Treasury, also known as 'TIPS'... The funds' annual expense ratios will be 0.2%." See also BGI Media Release.

After-tax fund rankings coming soon [Toronto Star, 23Aug03] "Do-it-yourself investors will get their first peek next month at a ranking of Canadian mutual funds that takes into account the effect of taxable distributions... Morningstar Canada will start to post a tax-sensitive version of its ranking of fund performance, its five-star rating system and tax-efficiency ratios on its public Web site in mid-September."

These bonds help fight stagflation [Financial Post, 23Aug03] "Greenspan's massive, sustained monetary stimulation has reawakened old inflation fears for bondholders. Long-term yields have risen and bond values have fallen... It doesn't take the kind of hyperinflation Germany suffered in the 1920s to savage bond values and currencies. Even moderate inflation of 3% to 5% will do severe damage over time."

The 14 Truths You Must Know When You Invest [TheStreet.com, 18Aug03] "Forget the stuff that Wall Street, the media and the mutual-fund industry peddle; the best route to long-term financial success is through low-cost passive investments such as index funds and exchange-traded funds... 'The basic premise of my book [The Successful Investor Today: 14 Simple Truths You Must Know When You Invest] is that the tremendous losses that investors had experienced were avoidable, and it had nothing to do with timing the market.'"

Vanguard founder sees industry flaws [Boston Globe, 17Aug03] "This industry is a real enigma to me. I am satisfied that a wonderful integrity-laden group of people comprise the leadership of the mutual fund industry, but they are congenitally blind to the problems they are facing. How they can sit on their perch and think all is right with the world is beyond my comprehension."

Finally, a use for that Y2K generator [Financial Post, 16Aug03] "High-speed Internet was down but across town a friend of mine who posts on the Internet as Bylo Selhi [www.bylo.org] reported he was posting by candlelight with a battery operated laptop using dial-up access on the still functioning telephone system."

What college doesn't teach you -- financial smarts [Globe and Mail, 14Aug03] "Many students are clueless about personal finance, which means there should be a wide audience for a new book called Sink or Swim, Get Your Degree Without Drowning in Debt (Dundurn, $19.99). If you're a student attending college or university, or you're the parent of one, I suggest you take a look."

Risk: What Exactly Is It? [IndexFunds.com, 10Aug03] "Since none of us can clearly see into the future, achieving an accurate assessment of risk and its related expected returns is a cornerstone of prudent investing. But first it is important to define what exactly is meant by 'risk.' Risk takes on many guises and can be different things to different people."

Sharp jolt for index of fund managers' renown [Financial Times, 09Aug03] "Vanguard analysed the performance of 420 US balanced mutual funds that operated in the period between 1962 and 2001...Vanguard found that, on average, more than 100 per cent of the long-term return of funds was attributable to asset allocation. In other words, the costs incurred in operating the fund were greater than the skills the managers displayed in either market timing or security selection." See also, Asset allocation should be your top priority [Sun-Sentinel, 13Aug03].

We'll pay, but don't call it advice [Financial Post, 06Aug03] "There is much hand waving about the superior performance of chosen professional money managers. The long-term evidence is no such superiority exists, nor can it be identified in advance. Collectively, professionals are the entire market and will achieve the collective return of the market before fees. Take 3% a year in expenses off the market's return, and more in taxable accounts, and an investor will end up way behind. An argument can be made that advisors provide other valuable financial advice. The difficulty is the advice is often decoupled from the mechanism which pays for the advice. Clients should be careful if they think they are paying for one thing but the person supplying it is being paid for something else entirely."

Seven Essential Facts About Indexing [Wall Street Journal, 03Aug03] [On linked page search for "clements", then select Aug. 3 article.] "Some things bear repeating....Here are seven things every investor needs to know."

The Probability That a Real-Estate Agent Is Cheating You (and Other Riddles of Modern Life) [New York Times, 02Aug03] "The most brilliant young economist in America...tends to see things differently than the average person. Differently, too, than the average economist."

Retirement Planning • Bond Example [Morningstar, 01Aug03] John Norstad's tutorial on how to allocate the bond part of your portfolio with examples, followed by a discussion amongst the Vanguard Diehards. "Note how this analysis leads to an opposite conclusion concerning duration than many advisors, who recommend staying short in bonds."

July 2003

MER heretic fires opening salvo [Financial Post, 31Jul03] "When fund industry leader Investors Group Inc. blinks on fees, can the rest of the industry be far behind?...The gospel of 'Cost Matters' is being preached even by some senior advisors at Investors' Winnipeg neighbour, Assante Corp." See also, MERs as Indulgences.

Mutual funds 'fee freedom day' July 28 [Financial Post, 24Jul03] "According to indexers Barclays Global Investors Canada Ltd., fund investors can mark July 28 on their calendars as the official fee freedom day for 2003. Based on five-year returns, that will be the day Canadian mutual fund investors stop paying their managers and start paying themselves, 'keeping the returns that their savings generate,' said Barclays marketing manager Howard Atkinson." See also, BGI news release.

The Stockholm Syndrome and the Market [IndexFunds.com, 23Jul03] "Since March 2000, many investors have found themselves victims of abuse. This April ten of the nation's top investment firms settled enforcement actions involving conflicts of interest between research and investment banking...Curiously, however, investors do not blame brokerage firms for poor performance in recommended stocks."

Sleep Soundly without Stocks [BusinessWeek, 28Jul03] "Conventional wisdom says buy stocks to save for retirement. Not necessarily so, says Zvi Bodie, a Boston University finance professor and co-author of Worry-Free Investing...Don't fool yourself into thinking that your basic needs are being taken care of in the long-run with a stock market portfolio. Much of the conventional advice about investing is dangerously misleading."

Keep the Faith on Wall Street? Forget It. [Wall Street Journal, 20Jul03] [If link has expired, search Archive for "clements", then select Jul. 20] "Believe nothing and nobody. Investors talk about their beliefs. They believe in value investing, or market timing, or technical analysis, or that nice young man at the local brokerage office. But this isn't church or politics. The market is an expensive place to have beliefs."

Revealed: the great stock market swindle [The Observer, 13Jul03] "Periodic catastrophic declines that destroy years of accumulated profits are the norm, not the exception."

Get Rich Slowly [TIME, 14Jul03] "The Intelligent Investor (1949), by financial giant Benjamin Graham, is more relevant than ever, in a new edition updated with analysis by Jason Zweig."

'Active' managers are closet indexers [Financial Post, 15Jul03 "Despite arguments like 'you get what you pay for' or that multimanager wraps holding various combinations of active managers must outperform, it turns out Assante is well-acquainted with research on the power of indexing."

Stewardship Apostle pp. 4-7 [Weedon, 11Jun03] "That Jack [Bogle], who now sports the title of President of Vanguard’s Bogle Financial Research Center, has chosen to spend his 'golden years' hopping from speaking platform to speaking platform, Congressional Hearing Rooms most definitely included, to excoriate his industry, corporate managements and the Street for enriching and entrenching themselves while treating investors shabbily in the extreme, is—face it—a mite unsettling. Rocking the boat just isn’t good form. Yet there’s Jack, forcefully advocating things like making mutual funds prominently disclose not only performance stats and proxy votes, but expense ratios, sales charges, portfolio transaction costs and other expenses —in terms their investors can understand and on a regular basis. Not to mention a federal statute spelling out a fund management’s fiduciary duty to its shareholders."

Don't believe the hype [Ottawa Sun, 13Jul03 "American financial adviser and author Larry Swedroe says most of what people think they know about investing is wrong. He cites two culprits - the brokerage industry and the media -- combined with public education systems that don't adequately teach about the markets."

Mutual fund scandal? Enough of the blame-game [Financial Post, 10Jul03 "There is no mutual fund scandal. There are greedy investors who did dumb things; and there are shrewd vendors who are trying to benefit from the fall-out. Let's hold off a little longer on Mr. Bogle's beatification."

How to avoid another risk trap [Financial Post, 10Jul03] "The actuarial model [employed by pension plans] is based on a fallacy. Over the long run, the risks in the stock market are not lower. The longer the time horizon, in fact, the higher the risk. 'Stocks are not a hedge against fixed-income liabilities even in the long run.'"

Canada's fund fees called 'criminal' [Financial Post, 10Jul03] "American indexing evangelist Larry Swedroe says the average Canadian mutual fund expense ratio of 2.62% is 'criminal' ... But he doesn't blame the investment firms which make these products: He points the finger at consumers' lack of education and the financial advisors who sell them high-fee funds."

You're footing the bill for fund trailer fees [Globe & Mail, 10Jul03] "Responsibility for the high level of MERs in this country is always pinned on fund companies, but advisers and fund dealers also have some explaining to do. They're the ones hooked up to that intravenous trailer fee drip, after all."

IFIC urges Ecker to reject proposal [Globe & Mail, 10Jul03] "The Investment Funds Institute of Canada, which represents the country's $388-billion fund industry, is urging Ontario Finance Minister Janet Ecker to reject a plan that would give independent boards representing investors the power to sack a manager."

How actuaries missed stock risks [Financial Post, 09Jul03] "Financial economists, led by a core group of actuaries and pension academics, blame the current pension fund crises on fundamental flaws in actuarial models that have perverse effects on pension decision-making. Those flaws drive pension managers into high-risk equity investments that crashed when the equity bubble burst."

10 Questions: Bill Bernstein [thestreet.com, 07Jul03] "[Q.] What's the one most important thing investors need to learn -- the one thing you want to impart for folks who might not go out and read your book? [A.] Costs matter. Index matters."

Efficient Frontier • Summer 2003 [Jul03] Margin of Safety in the Asset-Class Era (How would Ben Graham respond to, "Are we there yet?"); Insider Trading Drag ("For whom does the analytic bell toll? Only for those who understand which melodies contain useful information and what key they are in"); Mamas, Don't Let Your Babies Grow Up To Be Timers ("Varying allocations—'timing,' if you will—is similar to the consumption of alcohol. It can either enhance or degrade portfolio health; it all depends upon the circumstances and the quantity.")

June 2003

A matter of trust [Globe and Mail, 23Jun03] A week-long series on income trusts "reveals a shaky world of investments, where companies tap their bank credit lines to maintain distributions, external managers continue to reap great rewards from lucrative contracts, business structures can be best described as inscrutable and the tight focus of single-industry trusts is proving to be their downfall."

Fund managers in the line of fire [Financial Times, 23Jun03] "The world's biggest fund managers will this week stand accused of arrogance, complacency, mismanagement and incompetence in a devastating report by one of the most powerful management consultancies."

Malkiel unleashed: The full interview with Burton Malkiel [Wall $treet Week, 20Jun03] "COLVIN: You've said that investing [in individual stocks] is sort of like making love. What did you mean? MALKIEL: Well, I was again trying to suggest that it's a lot of fun, and even if you admit to yourself that you can't do it any better than the next guy, you sure don't want to give it up."

Securities regulators seek better income trust disclosure [National Post, 19Jun03] "Securities regulators are looking to tighten rules for income trusts amid concerns the public might not fully appreciate the risks associated with the popular investment vehicles."

The MER myths are shot down by a look at the hard facts [Globe and Mail, 17Jun03] "There are all kinds of reasons to dismiss low-MER funds and none are especially valid. To prove it, let's look at five myths associated with MERs and blow them up one by one...Go ahead and deny the logic of low-MER funds. Every time you do, you help the fund industry convince itself that the status quo on fees is just fine."

What Risk Matters? [First Quadrant, Jun03] "Most academics will tell us that the most important risk in an investment portfolio is some variation on standard deviation. Any practitioner 'knows' that it is the risk of being wrong and alone. This is sometimes called 'maverick risk.'...Which measure of risk is the most important? Whichever one hurts us, which we cannot know until after-the fact."

Trusting Markets to Be Efficient [Washington Post, 15Jun03] John Allen Paulos, author of the new book, A Mathematician Plays the Stock Market, sees a paradox in the Efficient Market Hypothesis: "If all investors were convinced that markets were efficient, they would simply sit on their holdings, never buying or selling. In such a world, new information about stocks would never enter the market, moving the prices of stocks in an efficient way. 'The EMH is true,' he said, 'to the extent that people believe it to be false and so, by their exertions, bring about efficiency.' Cool."

Sidestepping public scrutiny [Toronto Star, 15Jun03] "When fund companies take their management expense charges, investors don't know where the money goes, and with all the corporate shenanigans lately, the more disclosure we could have the better," said Scott Mackenzie, president of fund researcher Morningstar Inc.'s Canadian unit. "I'm surprised the public isn't more up in arms."

A Timely Book with a Timeless Message [BusinessWeek, 13Jun03] "Worry-Free Investing is written for today's investors: It explains how you can preserve your standard of living while limiting risk...Bodie and Clowes' investment advice resonates with the harsh lessons of the recent bear market...They believe stocks, even when held for long periods of time, are too risky for many people to achieve financial security. Instead, their idea is to lock in a long-term standard of living while taking as little risk as possible. Their preferred investment is U.S. government inflation-protected securities that preserve the purchasing power of a dollar against the ravages of inflation."

S&P Study Shows Cheaper Funds Outperform [IndexFunds.com, 13Jun03] "S&P reported that, on average, funds with lower expense ratios have outperformed their more expensive peers in eight out of the nine domestic fund style categories over a one, three, five, and ten-year annualized basis."

Fund industry isn't reasonable when it comes to fees [Globe and Mail, 12Jun03] "One thing you have to admire about the mutual fund industry is the way it flouts the natural laws of economics and business. Economies of scale rarely happen in fundland, and premium prices often mean the worst performance. The fund industry also wrote the book on bloated cost structures." The industry responds, Mutual fund study 'misleading'.

Fees top $10-billion last year, study says [Globe and Mail, 11Jun03] "Fund investors paid more than $10-billion in management fees last year, more than 3½ times the amount paid in 1995, according to a report from Morningstar Research Inc... the average management expense ratio (MER) ... for all Canadian funds soared to a record high of 2.62 per cent as of April 30. In 1995, the beginning of Morningstar's survey period, the average was 2.02 per cent."

Buy-side jobs disappear [Financial Post, 11Jun03] "Record mutual fund redemptions and downsizing because of industry consolidation have made the job market for fund managers the worst it has been in years, observers say... William Holland, president and chief executive of CI Fund Management Inc., says the job prospects for fund managers will be even worse a year from now." [Do you think the fund companies will share some of the cost savings and economies of scale that come out of this consolidation by lowering MERs? Hint: See stories immediately above.]

What Canadians pay for fund management [Morningstar, 10Jun03] "Despite tremendous industry growth, investors are generally not receiving the benefits of economies of scale...MERs for the average fund have increased significantly over time...The premium paid for active management of mutual funds vis-à-vis index funds is significant...Funds with higher MERs tend to have lower star ratings and have had worse performance results than those with lower MERs, and vice versa."

Prospect Theory [New York Times, 08Jun03] An, um, crash course in financial economics. "While behaviorists think that it is theoretically possible to beat the market," Richard Thaler says, "individual investors do not have the time or training to do that on their own, and finding superior skills among active mutual-fund managers is not easy, either. So a reasonable strategy to adopt is to settle for the average returns and low fees offered by index funds."

Professors write a recipe for fixing labour funds [Toronto Star, 05Jun03] "High fees make for lousy investments, and two associate professors of finance say Canada's labour sponsored investment funds, or LSIFs, are prime culprits. In a new prize-winning research paper, the two argue administrative fees are not just exorbitantly high, taking as much as 6 per cent of assets per year. There's the added problem that the interests of investors are subverted by the structure of management's incentive fees." See also: Study decries labour funds [Financial Post, 03Jun03] and Management fees hamper labour sponsored funds, study finds [Globe and Mail, 02Jun03].

Choosing the Right Path [BFMRC, 01Jun03] "Calling for integrity, ethics, and a return to the eternal standards of long-term investing is more than mere moralizing. Our very society depends on it, for our economic growth depends upon capital formation."

International Diversification [Investor Solutions, Jun03] "International investment reduces risk to the portfolio, and an investor that ignores that opportunity is bearing far more risk than necessary. Before anyone discounts this value, perhaps they should place themselves in the shoes of a Japanese investor in 1990. Almost no one was predicting that 13 years later that market would be selling at about 20% of its all time high."

May 2003

Journal of Indexes • 2nd Quarter 2003 [May03] Includes an interview with former SEC chairmain Arthur Levitt, who "speaks out on investor advocacy, market reforms, rogue lawmakers and more" and in Bogle's Corner, "insightful and brutally candid, indexing legend John Bogle takes a look at the good, the bad and the future of indexing."

If all else fails, give the fund a new name [Financial Post, 17May03] "Funds tend to change their names to be associated with the current high return style and to dissociate themselves from the current low return styles...the implication for fund managers desiring to increase flows is unambiguous: make a hot style name change and advertise it if you want the biggest possible increase in flows."

Hey, relax - sometimes it pays to procrastinate [Toronto Star, 15May03] "Procrastination could add value to the balance sheet of your life, says Moshe Milevsky. The cost of changing your mind or closing out options makes it risky to rush into major life decisions. So putting things off until you have gathered enough information could help you make the most of your personal assets — both human and tangible."

The Sales Pitch Disguised as Good Advice [Investor Canada, 13May03] "You don't pay financial advisors for their advice, you pay for the execution of their advice. Watch for these red flags that may really be a sales pitch disguised as advice."

What Motivates Investors? [Investor Solutions, May03] "We are not as rational as we think we are...Behavioral finance attempts to understand and explain how human emotions influence investors in their decision making process."

Nobelist Kahneman Follows Simple Financial Plan [Bloomberg, 12May03] "By investing in index mutual funds and U.S. Treasury Inflation-Protected Securities, or TIPS, Kahneman said his primary retirement planning focus is beating inflation and maintaining steady income -- a strategy much at odds with Wall Street's mantra of maximizing return."

How Would You Like to Pay For Advice on Your Finances? [Wall Street Journal, 11May03] [If link has expired, search Archive for "clements", then select May. 11] "If you use a broker or planner, you clearly want somebody who is experienced and ethical. But you should also give careful thought to how much the adviser charges and how the fee is extracted."

Does your advisor eat his own cooking? [Financial Post, 10May03] An honest broker? "My prime directive is to align our interests. Our interests are aligned because we have an identical interest in the same stocks ... I will continue to take all of my own advice... I will not ask you to invest according to my recommendations and then put my money elsewhere ... if you suffer, I will suffer. If I prosper, so will you."

All About ETFs [IndexFunds.com, 09May03] The manager of BGI US equity iShares "offers a unique insider's perspective on what goes into running an ETF on a daily basis, and also discusses the intense preparation that leads up to trading the upcoming annual Russell index rebalance."

Interview: Burton Malkiel Part 1 • Part 2 • Part 3 • Part 4 • Part 5 [The Motley Fool, May03] "diversify, diversify, diversify. I want them to own not only common stocks, I want them to own some real estate through a real estate investment trust. I do want them to own some corporate bonds... Risk and return are related. You get paid to take on some risk."

Bogle in exile [Boston Globe, 09May03] "Is Jack Bogle one more founder who couldn't let go? Is Jack Brennan a protege who couldn't stand in the shadow of a giant? I do not pretend to know. But I do know that this is one story that should not end this way."

Pension Puzzle: Retirement seems so far away [Toronto Star, 08May03] "Many folks who were on an express route to retirement have encountered a detour. After three years of stock market losses, they will have to drive a lot faster to reach their Golden Pond, take a longer time, or brace themselves for something more modest, perhaps on Mud Puddle."

Notes from the 2003 Berkshire Hathaway Annual Meeting [Tilson, 05May03] Wit and wisdom from the Oracle of Omaha on a wide range of topics from Berkshire Hathaway's financials, to derivatives, scandals, investment advice and how to achieve happiness.

Be Aware of the Role of Wall Street's Middleman [Wall Street Journal, 04May03] [If link has expired, search Archive for "clements", then select May. 4] "Do I seem too cynical? Not a chance. Trust me, on Wall Street, you can never be too cynical."

Doling out the perks with the block trades [Financial Post, 02May03] "Chances are good that your mutual fund or pension fund manager pays at least twice the going rate to buy and sell stocks, and he has little or no incentive to negotiate a better deal...Mutual fund companies don't mind the arrangement because the cost of research, trips, and meals is footed by the unitholders, whereas if trading commissions were solely directed at trading, these costs would be billed to the fund company itself."

April 2003

What I've Learned In A Half Century In Business—Twelve Rules For Building A Great Work Force [BFMRC, 23Apr03] "I’m not sure, truth told, that you need more than one rule. It’s several thousand years old, and was expressed this way: 'Do unto others as you would have others do unto you.'"

Advisor quits big bank in disgust [Financial Post, 22Apr03] "I have sought to be an effective steward of my clients' portfolios... But increasingly the firm is sending the message that making money for clients comes second to making money from clients... I will not sell overpriced, sexy-looking trash to people who have placed their finances in my hands."

A Conversation With Robert Shiller [SmartMoney, 23Apr03] "Now Shiller [author of Irrational Exuberance] is back with a new book, "The New Financial Order." It's been called utopian, visionary, bold, fascinating and even, says Business Week, 'a little crazy.'"

Still trying to teach Wall St. [Philadelphia Inquirer, 15Apr03] "Some people can beat the market some of the time, but virtually no one beats it all of the time, Malkiel wrote. Be broadly diversified, keep trading costs low, and think long term, he advised."

A New Way to Regulate [BCSC, 15Apr03] The British Columbia Securities Commission introduces draft legislation to implement a new securities regulation model. Under this model, foreign securities dealers and mutual fund companies are exempt from BCSC regulation providing they don't solicit clients in BC. Instead they must provide such clients with a written "risk warning."

On-line brokers make investing in DRIPs easy [Globe and Mail, 12Apr03] "Many on-line brokers offer DRIPs and, what's more, these brokers make these investing plans easy to set up and use."

Investors shouldn't let overconfidence sidetrack financial goals [Boston Globe, 10Apr03] "No matter what strategy you're choosing, people who can't stay the course with it -- who look out and see potential outcomes they couldn't live with -- probably shouldn't be in the strategy to begin with... And if they're not looking at what could go wrong, then they're simply hoping that they've got it right. That's probably not the best idea either."

iShares to Offer New MSCI Emerging Markets Exchange-Traded Fund [BGI, 11Apr03] "Barclays Global Investors (BGI) announces that the iShares MSCI Emerging Markets Index Fund (ticker: EEM) will begin trading on the American Stock Exchange on April 11th. The new fund is benchmarked to the MSCI Emerging Markets Free (EMF) Index...The fund's expense ratio will be 0.75%..."

The hidden pitfalls of income trusts [Financial Post, 10Apr03] "Hardly a week goes by without the Canadian brokerage industry bringing out another income trust issue...The whole inflated structure of income trusts will collapse, and sooner rather than later. Investors need to recall that the return of capital is more important than the return on capital. And that if something appears to be too good to be true, it is." See also A New Investment, Courtesy of Canada [New York Times, 13Apr03]

John C. Bogle’s Advice: Live Long and Prosper, on Index Funds [Knowledge@Wharton, 09Apr03] "'An investor who isn’t worried about what is going on in the world is a damn fool,' Bogle said...But that doesn’t mean, he added, that investors should do radical surgery on their portfolios. The war in Iraq, for example, probably won’t have any long-term effect on the stock market, though the wide price swings since fighting began demonstrate its emotional toll on investors. 'Emotions lead to the exactly wrong conclusions,' he warned."

AIC calls for after-tax disclosure [Globe and Mail, 09Apr03] "Prof. Milevsky's research team examined 10 years of historical rates of return from 343 equity and balanced mutual funds managed by Canadian companies, to assess the impact of personal income taxes on the funds' relative performance and rankings." See also AIC investors must cope with focused funds [Toronto Star, 09Apr03] for another perspective on the study and its sponsor. The complete research paper is here .

Updating 'Random Walk' [San Francisco Chronicle, 06Apr03] "One reason I keep updating my book (which has sold more than a million copies) is to continually test whether the strategies I suggest work, and they do."

Seven Vanguard index funds to change benchmarks [Vanguard, 03Apr03] "We believe that the new indexes developed by MSCI will reflect the performance of the funds' targeted market segments more accurately than any other available indexes." See also: Vanguard Switches Indexes on Six Funds [Morningstar, 03Apr03]

Mutual funds' way of paying under fire [Financial Times, 02Apr03] "John Montgomery, president of Bridgeway Funds, in Texas, testified that soft dollars were 'one of the worst conflict of interest issues' for funds...Mercer Bullard, chief executive of Fund Democracy, a mutual fund watchdog group, says the problem with soft dollars was that expenses otherwise paid out of a manager's pocket were not included in the expense ratio."

Efficient Frontier • Spring 2003 [Apr03] The Retirement Calculator from Hell, Part V ("You may think that a real dollar -- one that has been adjusted for inflation -- may buy you just as much satisfaction in the future as it does today. But you’d be wrong."), The Returns Fairy ... Explained, ("I’m going to discuss the single most important issue in finance -- future stock market returns -- in the clearest, most descriptive, least mathematical terms possible.")

March 2003

Regulators' proposals don't make sense [Toronto Star, 30Mar03] "The proposals raise fundamental questions as to the ability of individual investors to play a meaningful role in protecting themselves...We are already seeing the impact of a growing lack of confidence on the part of individual investors. Steps that have the potential to increase this lack of confidence and drive investors from the marketplace do not augur well for anyone. It would be the ultimate failure."

Fund Disclosure Proposals Flawed [Investor Canada, 28Mar03] "Proposed changes to the way investors get information about mutual funds and segregated funds is a welcome change. But flaws in the proposals do investors more harm than good, says Ontario Securities Commission former commissioner Glorianne Stromberg... 'There’s a big difference between the right to say don’t send me the information and the right to get the information as a matter of entitlement.'"

Looking behind the sales pitch [Boston Globe, 27Mar03] "If I'm a client of a financial adviser who is selling me a product - particularly one like a variable annuity or a universal life insurance policy or something I wouldn't wake up in the morning and decide to buy on my own - I want to see the sales pitch that got the broker or planner to buy in to the idea... 'But I've never heard of anyone being sold an investment product asking for the sales literature before.' News flash for consumers: Start asking."

In search of those elusive returns [The Economist, 20Mar03] "The accepted wisdom, that equities offer superior returns in the long run, has recently looked a little hollow... Yet most of the alternatives to pure equities...all seem loaded with their own mixture of downside risk and lacklustre returns. What can an asset manager do, apart from hiding under the duvet?"

Arguing Against Equities [ NY Times, 19Mar03] "The stock bubble has burst, and then some. But even amid the wreckage, the conventional mantra has continued: stocks are still the long-haul key to preparing for financial security in retirement. But what, actually, if they're not? Quietly, in obscure financial journals and actuarial conferences, some alternatives are being debated. So far, the ideas have received little public attention."

Financial services need innovation [Scott Burns, 18Mar03] "Economist Gary Shilling offers a radical notion. Change in the financial services industry won't come from existing firms...Citing the steel and airlines industries in the February issue of his newsletter, Shilling points out how individuals and industries resist change...'(I)t may be very difficult for many existing institutions to cut their costs sufficiently to bring their charges in line with likely investment returns,' Shilling notes."

You Can Beat the Market? A Study Says 1 in 5 Can [ NY Times, 16Mar03] "A new study has found that as many as 20 percent of investors may be able to regularly pick stocks that beat the market... How can the research help you know if you are part of the elite stock-picking group?... That is difficult, because the study used complex statistical tests to determine genuine ability. But Professor Coval suggests this test..."

Mutual Fund Industry Practices and their Effect on Individual Investors [BFMRC, 12Mar03] "To awaken investors to the critical importance of lower costs, we need information that encompasses all of the costs of fund ownership, presented forthrightly in fund prospectuses and annual reports, and we need to show in each annual statement the dollar costs that each investor incurs. At the same time, we need to empower independent directors to live up to the standards of the law of the land and protect the interests of the fund shareholders they are honor-bound to represent."

Congress Takes Lid Off Mutual Funds [Forbes, 12Mar03] "John C. Bogle, the founder of Vanguard Group, implored representatives to 'follow the money,' questioning how expense ratios at Vanguard could have fallen to 0.26% from 0.62% in the past 25 years when the industry average climbed to 1.36% from 0.91%. At the same time, assets have grown to $6.5 trillion from $56 billion--leading Bogle and others to question how such a remarkable economy of scale could possibly lead to higher expense ratios and other fees."

Indicator shows final low may be near [ CBS MarketWatch, 11Mar03] Mark Hulbert on using the popularity of market timing to time the market: "Historically, I noticed, buy-and-hold reaches its peak of popularity at market tops, just as market timing becomes most out of favor. The inverse tends to be the case at market bottoms...To be sure, the Market Timing Popularity Indicator cannot pinpoint exact tops or bottoms. But it is one piece of the puzzle that needs to be in place before the market can turn. And from where I sit, reading 170 newsletters every day, it now seems firmly in place."

Fund critics applaud Buffett's fund board comments [Yahoo, 10Mar03] "A number of critics of the U.S. mutual fund industry said on Monday they agree with billionaire investor Warren Buffett's assessment that 'zombie-like' fund directors have fallen down on the job. 'He is right on target,' Roy Weitz, an industry watchdog who runs the FundAlarm.com Web site, told Reuters. 'Very few people are willing to come out and say what he did, that the role of fund directors is to find the best manager and negotiate the best fee.'"

Annual Letter to the Shareholders of Berkshire Hathaway [Warren Buffett, 08Mar03] "A monkey will type out a Shakespeare play before an 'independent' mutual-fund director will suggest that his fund look at other managers, even if the incumbent manager has persistently delivered substandard performance. When they are handling their own money, of course, directors will look to alternative advisors – but it never enters their minds to do so when they are acting as fiduciaries for others."

Cash still king for Sarbit [Financial Post, 07Mar03] Advice from an active mutual fund manager who charges a 2.6% MER to sit on cash: "Investors unable to value stocks like Buffett or who can't find mutual fund managers adhering to that approach 'may as well use high-quality bonds and index funds, where at least they don't pay high fees. I'll go further. Indexing is a good alternative to most of the junk that's out there.'" [Of course anyone can hire Buffett directly. Just buy shares of BRK.b and hold them "forever." The "MER" is a mere 0.02%, the tax efficiency is 100% and the value is "priceless."]

Wealth Logic [Investor Canada, 07Mar03] "In a new book titled Wealth Logic, women make better investors than men, dollar cost averaging is just an illusion, and you don't need to start saving for retirement until the age of 35, says Schulich School of Business, York University Finance Professor Moshe Milevsky"

Tax-prepaid savings could be retirement option [Toronto Star, 05Mar03] "Here's a piece of news you may have missed in last month's budget: The federal government will look at introducing a new way of saving for retirement. The tax-prepaid savings plan, or TPSP, is intended to supplement the registered retirement savings plan... Your investments grow tax-free, as with an RRSP. But you get no tax deduction for your contributions, nor do you pay any tax when the money is withdrawn."

February 2003

What Went Wrong in Corporate America? [BFMRC, 24Feb03] and what can be done to correct it. "As investing has become institutionalized, stockholders have gained the real—as compared with the theoretical—power to exercise their will. Once owned largely by a diffuse and inchoate group of individual investors, each one with relatively modest holdings, today the ownership of stocks is concentrated—for better or worse—among a remarkably small group of institutions whose potential power is truly awesome. The 100 largest managers of pension funds and mutual funds alone now represent the ownership of one-half of all U.S. equities: Absolute control over corporate America."

Costello ruling raises interesting questions [Toronto Star, 23Feb03] "The basic question is, what do we have a right to expect from those who advise us? We believe that any advice given to a client should be in that client's best interest. Any fee or inducement that might compromise the advice is in conflict with the client's best interest. Acting in a client's best interest should be rule number one in the investment business. No breach of that principal should be tolerated. The disclosure requirement is very clearly laid out in Section 40 of the securities act, but we know, and our readers know, that it is not adhered to." and readers' comments.

Out of harm's way [Toronto Star, 22Feb03] "Canadian and U.S. governments offer bonds that protect investors' purchasing power from inflation. 'They're a very good long-term asset to hold,' says Doug Porter, senior economist at BMO Nesbitt Burns. 'For many people, they could form a core component of an RRSP. You really know what you're getting for the long term.'"

Magellan investors overpaid $330 million [CBS MarketWatch, 21Feb03] "Investors pay the Fidelity Magellan Fund $429 million annually to manage their $55 billion. In contrast, investors pay Vanguard $99 million to run the Vanguard 500 Index, also a $55 billion fund... What are Fidelity's investors getting that Vanguard investors aren't? ... Here's a hint: Nothing"

Stop sabotaging your retirement [CBS MarketWatch, 18Feb03] "If a brilliant Nobel Laureate and Princeton professor like Daniel Kahneman has concluded that his 'irrational man' theories tell him that indexing is the best investment strategy for his retirement money ... shouldn't you be indexing your retirement money? Or are you in denial about being irrational, still convinced you can beat the index averages?"

Performance of Index vs Active Portfolios A 15-year (ending 31Dec02) performance comparison between portfolios comprised of the median actively managed funds versus similarly-weighted portfolios of index funds. Indexing continues to beat active by a substantial margin--despite the now 3-year old bear market. How does your portfolio measure up?

Real return bonds offer hedge against inflation [Toronto Star, 13Feb03] "It's hard to beat inflation when interest rates are so low. So have you considered a real return bond? ... If more of us demanded inflation-indexed bonds, Ottawa, the provinces and some companies might offer more."

Financial advisers need to take a little advice themselves [Globe & Mail, 13Feb03] Canada's largest association of financial advisers: "The public has lost confidence in the integrity of the industry, throughout all disciplines, including insurance, investing and financial planning."

Investor apathy, ignorance are main cause of high fund fees [Globe & Mail, 12Feb03] "Everywhere you turn these days, investors and pundits are grumbling about the high costs of mutual funds ... If you want to understand how to maximize value as a mutual fund investor, it helps to see where the interests of the various players lie. It helps to understand that financial planners have interests that can be in stark contrast to yours. Apathy and ignorance, you'll find, are costly."

SEC Listening to Bogle Sermon on Fund Expenses [Bloomberg, 11Feb03] "Now that the bear market has been devouring investor assets for three years, [Jack] Bogle's preaching has caught the ear of Washington regulators and may force changes in how fund expenses are disclosed ... Bogle's homily that mutual fund expenses are potentially ruinous needs to be heard by more investors. Although fund companies have no control over sour markets, they can scale back or rebate fees."

Know a Fund's' Cost? Look Deeper [ NY Times, 09Feb03] Mutual funds don't include brokerage costs, bid/ask spreads and market impact costs in their management expense ratios. "'It's a dirty, sleazy area that most [mutual fund industry] people would not like to see the light of day,' said Mr. Aronson, who runs a small-cap value fund for the Quaker Funds ... Increased disclosure might change the way investors select their funds and the way portfolio managers run them. 'The day after commissions are disclosed,' said Mercer Bullard, president of Fund Democracy, a fund shareholder advocacy group, 'you will see turnover fall dramatically.'"

Advisers sound call to action [Toronto Star, 08Feb03] "[Brian] Mallard [chair of Advocis, brand name of the Financial Advisors Association of Canada] said yesterday that the entire financial services industry is being hurt by the lack of professional accreditation, and lack of uniform regulation across the country. He estimates that only about one third of the nearly 100,000 Canadians who sell financial products or advice have professional designations that require adherence to a code of ethics. Advocis is urging its members to obtain the Certified Financial Planner or Chartered Life Underwriter designations."

July 28th is Fee Freedom Day For Canadian Mutual Fund Investors [BGI Canada, 06Feb03] "Fee Freedom Day is just another way of showing how much mutual fund costs matter. Mutual fund costs, in the form of MERs, have a huge impact on returns over the long term-especially today, when expected returns are generally lower.

Don't let tidal wave of financial information ruin your surfing [Financial Post, 06Feb03] "When it comes to investing, the Internet is a classic example of a double-edged sword. It's potentially a wonderful source of investor education but is also rife with misinformation and sometimes outright fraud."

Historical returns can be misleading [Financial Post, 04Feb03] "Is the financial industry feeding undue expectations as it tries to reassure clients who have grown weary of stock market losses?" After accounting for the fees and other expenses of the real world, the picture may not be as rosy as you may have been led to believe.

Will you have enough to retire? [Financial Post, 04Feb03] Find out using this retirement calculator that's based on Bruce Cohen's book, The Pension Puzzle.

Investor e·ducation Fund [OSC/CSA, 04Feb03] In a wrinkle of irony, fines levied on errant brokers and advisors funds a site that "contains information on a variety of financial topics from investment fraud, to mutual funds, to how to choose an adviser."

Mutual distrust [Canadian Business, 03Feb03] "Morningstar's statistics make another thing clear: the reason why mutual funds, in aggregate, underperform market averages in the long run is largely due to management fees, which Warywoda says average about 2.7%. 'Costs,' he says, 'are a hurdle that active managers must jump over to match or beat a representative index.' ... 'I’ve heard the proposition many times, and we have never done any research to support or refute it,' said John Parker, vice-president of finance and administration and IFIC’s official statistician."

January 2003

Words from the Wise [CFA Magazine, Jan/Feb03] Seven living legends share "their firsthand insights on the evolution of the industry, recommendations on corporate governance solutions and the best lessons they learned as investors."

The Wisdom of John Bogle • Part 1 • Part 2 [Investor Canada, 28/29Jan03] "People are very unaware that this industry has changed its mandate from stewardship in the old days to salesmanship in the present era. We advertise our funds with the highest returns that are rarely if ever repeated ... Investing basically is about avoiding potholes. The economics of investing in the long run are good. The emotions of investing ... have led people to do very, very badly."

Index funds not a bear market disaster [Globe and Mail, 25Jan03] "The whole point of index funds is their ability to reap higher returns than a majority of actively managed mutual funds. We know index funds can do this in a bull market from the experience of the late 1990s, and now it seems they can do it in a nasty bear market as well."

Apples vs. apples, and indexes win [Philadelphia Inquirer, 23Jan03] "While managed funds won over a few short-term periods, the indexer won in all the holding periods of five or 10 years, on both a pre-tax and after-tax basis ... The key factor is the higher fees charged by managed funds, and the higher taxes their investors pay because active managers constantly sell winning stocks to chase the latest hot companies." See also Indexes top managed funds' performances [Philadelphia Inquirer, 21Jan03] "the figures make a compelling case that over the long run, index funds are more profitable than funds managed by the 'pros.'"

Indices vs. Active Funds Scorecard, First Quarter 2003 [Standard & Poors, 22Jan03] "Over the worst three year market run since 1941, the S&P 500, S&P MidCap 400 and S&P SmallCap 600 indices outperformed 53.5% of large-cap funds, 77.3% of midcap funds, and 71.6% of small-cap funds, respectively." This, despite "significant amount of liquidation and merger activity among funds" which resulted in a survivorship bias of "8.6%, 2.8%, and 4.9%, respectively, in favor of large-, mid-, and small-cap [active] funds."

iUnits Index Funds Finish in First and Second Quartile in 2002 [BGI Canada, 21Jan03] "It is time to lay down the myth that active management adds value in flat or down markets. The globefund.com data show that for all the major asset classes the median active fund did not beat the index in last year’s punishing markets."

A new perspective on retirement plans [Toronto Star, 21Jan03] "The reports will raise some well-deserved doubt about traditional financial plans, which typically assume a single and unvarying rate of investment return. His research shows how badly fluctuating investment returns can sabotage someone who needs to withdraw money periodically."

Does International Diversification Increase the Sustainable Withdrawal Rates from Retirement Portfolios? [FPA Journal, Jan03] "examines the effect of international equity diversification on the sustainability of a range of withdrawal rates from retirement portfolios with varying U.S. and international stock/bond asset allocations ... suggests that retirees with portfolios composed of 50 percent equities or greater would benefit only modestly in the long run from international diversification."

Small Caps: Indexing Beats the Pros [BusinessWeek, 20Jan03] "The past few years have tarnished many of Wall Street's pearls of wisdom: Buy on the dips. The trend is your friend. Tech stocks aren't cyclical. Now, it's time to call into question another one--that actively managed mutual funds trump index funds when it comes to small-cap stocks."

Design your own timetable for RRSP investing [Toronto Star, 19Jan03] "Let's dispel the idea that there is an RRSP contribution deadline... That's a comforting thought if you have other financial priorities. You can postpone your retirement saving and make it up later. You don't have to make your full RRSP contribution every year. 'Retirement funding rests on the premise that you will build up a fund over the course of your career,' say Bruce Cohen and Brian FitzGerald in The Pension Puzzle: Your Complete Guide To Government Benefits, RRSPs And Employer Plans (John Wiley & Sons, $24.95)." See also What should you be saving for retirement?

Good plan begins with a few simple steps [Toronto Star, 18Jan03] "Many Canadians make January resolutions to plan their finances more effectively but are unsure how to draw up a plan. A simple solution is to take a modular, piece-by-piece approach ... As with many things, beginning the process is the toughest part."

Vanguard is No. 1, but some ask at what price [Philadelphia Inquirer, 19Jan03] "Vanguard Group has edged Fidelity Investments to become the nation's biggest mutual-fund company... But some current and former Vanguard managers and workers say all that emphasis on low costs means 'redeployments' at lower wages and an increase in punishments or even firing for what used to be minor infractions. Vanguard denies that... Disgruntled workers, along with small-account customers rankled by new, higher fees, have complained to [retired founder Jack] Bogle, who maintains an office at Vanguard headquarters and continues a public crusade against high investment fees and for improved corporate governance."

Straight talk about today's markets [Saturday Night Live, 18Jan03] "Well, obviously, if you think, as we did, that stocks are heading down, and you want to unload them before a crash, you have to convince somebody out there to buy them. That's just common sense." [The two minute video requires Windows Media Player and a high-speed connection.]

CEOs to blame for pension fund crisis [Toronto Star, 18Jan03] "Obviously, the remarkable meltdown in pension-fund assets is an indictment of the money management profession, where pay for investing sages rarely dips below the high six figures. More culpable, though, are CEOs who, for personal gain, put their current and future retirees at undue risk by starving pension funds during the good times and failing to set aside reserves for the day when Newton's laws will reassert themselves in the market."

Best-case or worst, indexing still wins [CBS MarketWatch, 17Jan03] "Indexing beats actively-managed funds in bearish 2002: Knowing that indexing wins in a bear market is important, because today only five percent of all funds are index funds and only a third are no-loads. As a result, almost all of the marketing hype coming from Wall Street's brokers and fund industry ads is designed to convince the passive 99 percent that actively-managed load funds can beat their indexes. Unfortunately for them, they can't beat their indexes."

These sites will help you find out more about ETFs [Globe and Mail, 16Jan03] "ETFs charge much less than traditional funds in management expenses, which means there are more returns left over for investors after a fund pays itself. ETFs also trade less than most equity funds, which means there are fewer taxable distributions for people investing outside registered accounts."

The Mutual Fund Industry in 2003: Back to the Future [BFMRC, 14Jan03] Jack Bogle reviews what ails the mutual fund industry, calling on it to "put the interests of shareholders ahead of the interests of managers and distributors [and to] return to its focus on broadly-diversified funds with sound policies, sensible strategies, long-term horizons, and minimal costs."

Bogle tells mutual fund industry to stop the pain [Forbes, 14Jan03] "John Bogle, who pioneered index-based investing and founded Vanguard Group, the No. 2 U.S. mutual fund company, said on Tuesday the industry should forget about developing newfangled products and stop harming average investors. 'Mutual fund managers today are not investors. They are speculators,' Bogle told his dark-suited and mostly silent audience."

Another way to lose your money [Financial Post, 11Jan03] "As the bear market progressed, the industry realized many advisors were no more competent to pick winning mutual funds than their clients. Rather than admit this and recommend low-cost index funds and ladders of strip bonds, the industry went in the opposite direction, adding yet another level of "expertise" and fees ... the result is already-sky-high MERs are shooting into the stratosphere." See also, part two, Drawing the line on fees [18Jan03].

Trust the experts to get it wrong [The Independent, 11Jan03] "The consensus of leading opinion has consistently been as comprehensively wrong as it is possible to be" and Hocus pocus [Financial Post, 08Jan03] "It's the time of year when market analysts offer up their annual forecasts based on logic and evidence. They should leave it up to the psychics."

Efficient Frontier • Winter 2003 [Jan03] Open Letter to the New SEC Chairman ("While the equivalent of a graduate degree is required to certify a tax return, not even a high school diploma is needed to manage a client’s life savings."), The Probability of Success, ("Come to a Vanguard Diehards meeting and you’ll think there is hope. Then travel a few feet down the hall where the gurus of the month are holding forth and you’re quickly brought back to reality.") Retirement Calculator from Hell, Part IV, ("what we have is not a savings crisis, but rather a demographic crisis.") The Final Cowards' Update {"The point has been proven."} and The SAD State of Stock Market Returns.

Dear Abby, It's Time to Apologize [TheStreet.com, 08Jan03] "When I heard you were appearing on Louis Rukeyser's Wall Street last week as his special guest, I watched with interest, with the outside hope that perhaps you would finally apologize for making all those grandiose market calls during the go-go years."

Saint Jack on the Attack [Fortune, 08Jan03] "Bogle argues, investors in mutual funds have been almost criminally misserved."

Interview with John Bogle, Vanguard Group Founder [IndexFunds, 07Jan03] "Indexing is so simple, and it really has absolutely nothing to do with efficient markets ... I like to get down to the facts; I like to get the logic and the theory straight. I guess I'm an apostle of common sense more than anything else." The interview continues here.

Eight investing mistakes [Globe and Mail, 04Jan03] "Truth is, avoiding the common mistakes of investing is half the battle in getting good results. Here, then, are eight investing mistakes to avoid in 2003."

Callan Periodic Table of Investment Returns 1983-2002 [Callan Assoc.] is a "representation of relative asset class performance over the last 20 years. The table depicts annual returns for eight asset classes, from 1983 to 2002, ranked from best to worst. Each asset class is color-coded for easy tracking. Well-known, industry-standard market indexes are used as proxies for each asset class." [See also Callan's data for 1982-2001, 1981-2000, and 1980-1999 as well as Franklin-Templeton's 1983-2002½ data that includes REITs.]