Novel ways to give to charity [Globe & Mail, 22Dec01] We spend the rest of the year accumulating wealth. Now is a good time to consider some tax-efficient ideas on how to share with those who are less fortunate.

Piecing together the retirement puzzle [Financial Post, 22Dec01] Jon Chevreau reviews The Pension Puzzle, a new book by Bruce Cohen and Brian Fitzgerald. This is essential reading for any Canadian who wants to learn about pension plans, including CPP/OAS, RRSPs and private DB/DC plans.

Ten Things Your Financial Planner Won't Tell You [SmartMoney, 18Dec01] Not all planners are dangerous to your financial health. Here are some tips to help you separate the good ones from the charlatans.

The Lifetime Cost of Money Management [Scott Burns, 18Dec01] "Your money can be managed by a Mensa member with perfect Sunday School attendance--- but if he charges 200 basis points to manage your money, the lifetime cost is higher than our highest [US] Federal tax rate. It will cost you millions of dollars and years of income."

Jack Bogle, Man on a Mission [TheStreet.com, 17Dec01] Jack Bogle stays the course trying to save our money from the croupiers.

We've got to get back to basics in this industry and give the mutual fund shareholder a fair shake. ... Well, there are a lot of vested interests in this industry, and I'm a lonely soul. ... The investors are paying attention, and they like what I'm saying because I'm telling them the truth. No one in the industry has ever argued that these things aren't factually correct that I'm saying.

Real Return Bonds for Canadian Dummies [14Dec01] A handy reference for anyone interested in Government of Canada Real Return Bonds. Includes a brief description of how they work, frequently-asked questions and answers, many links to related information, and a short glossary.

Unhitch your fund's trailer fees [Financial Post, 13Dec01] Don't get fogged by smoke and mirrors as fund companies rush to F class shares and actively-managed ETFs. Whether it's called a trailer, a wrap, or an advisory fee, an extra 1% a year will eat a big hole into your portfolio. If you need the service then by all means pay for it. But understand what you're paying for, make sure you get value for money, and be careful that you don't end up paying it twice.

Understanding the Tax Implications of Exchange Traded Funds [BGI Canada, Dec01] The impact of taxes is an important factor in evaluating and selecting investments. A memorandum prepared by PricewaterhouseCoopers LLP summarizes the key tax implications of ETFs for Canadian individuals.

Mr. Buffett on the Stock Market - Redux [ Fortune, 10Dec01] An update on Warren Buffet's famous essay of November 1999. Hamburgers are cheaper than they were in 1999, but they're not yet on sale.

Buy this fund and pay me more [Financial Post, 07Dec01] Yet more schemes for putting an adviser's interests ahead of their client's:

Glorianne Stromberg, who wrote two reports for the Ontario Securities Commission outlining dubious fund sales practices, said things have gotten worse since she criticized the switch three years ago. "It's obscene and reprehensible," Stromberg said yesterday, adding that advisors who counsel such a switch "should be drummed out of the business." ... One fund company executive who can't be identified says some advisors are holding a gun to the heads of fund companies, threatening that if they don't top up trailer fees on their DSC funds they'll switch client assets to rival fund companies that do.

The Wisdom of Investment–The Folly of Speculation [BFMRC, 05Dec01] Whether you rely on elaborate academic proofs or simply consider that "costs matter," investing in broadly diversified index funds is the winner's game. In Jack Bogle's view,

owning the market and holding it forever is the ultimate strategy for winners. When investors, in the hope of carving out an edge, use index funds to make outsized bets on narrow market sectors or to vigorously trade their portfolios, they have adopted the ultimate losers' strategy. When investors abandon the wisdom of investment and undertake the folly of speculation, using a great idea to implement a flawed strategy, they are bound to be disappointed.

Shift in CIBC focus puts whizz in closet [Financial Post, 05Dec01] If you're wondering how CIBC's purchase of Talvest (let alone Merrill Lynch Canada!) fits into Ted Cadsby's message about low cost indexing, read this and cringe.

Mr. Cadsby's pitch -- load up on index funds, and mix in a few good actively managed ones -- is sound. But it is not necessarily best for CIBC's bottom line. Even after you factor in things like research expenses, there's more gravy in a fund that charges 3% than a fund that charges less than 1%. ... Which means we should all get used to hearing a lot more about the merits of Talvest, and a lot less of Ted Cadsby's sensible advice.

Strategies for cutting through the hype [National Post, 05Dec01] "As Canadians brace for the annual RRSP season, there are two themes investors should use to cut through the inevitable hype and clutter. They are asset allocation and costs."

No free lunch with funds [Financial Post, 01Dec01] Mutual fund MERs range from under 0.3% to over 3%. Over an investor's lifetime they can consume as much as 60% of your assets.

November 2001

Going Extinct: An ETF Roundtable [FundLibrary, 29Nov01] An edifying discussion among several Canadian indexing and ETF luminaries.

Portfolio Risk In Dollar Cost Averaging Jeopardizes Retirement [DirectAdvice, Nov01] Frank Armstrong questions the conventional wisdom that DCA works best in volatile markets because it lets you buy more low. "Not so. In fact, volatility - or risk - is the enemy of any wealth accumulation program. And investors who take excessive risks, in pursuit of illusory gains, may only wind up broke in the long run."

The New Investment Frontier [25Nov01] Bylo reviews Howard Atkinson and Donna Green's new book on ETF investing for Canadians.

Financial products on the cheap [Globe & Mail, 24Nov01] A handy directory of low-cost, online banking and brokerge services available to Canadians and ABCs of picking funds start with MERs [Globe & Mail, 27Nov01] provides an incomplete summary of low-cost mutual funds. (Hey Rob, how about PH&N for the active-management crowd, or CIBC's MER rebate for inveterate indexers?)

One on One with Gus Sauter [Investment News, 19Nov01] Vanguard's indexing guru on why actively-managed funds as a group can't outperform in a bear market any more than they can in a bull market:

One active manager can only get out of a stock to the extent that somebody else gets into it. So really it amounts to shuffling deck chairs on the Titanic. All that happens is a rearranging of who the owner of a stock is. But you can’t get rid of it. Active managers, in aggregate, can’t all move to stocks that would perform better in a bear market — just the way they can’t all move to the best-performing stocks in a bull market.

Risk and Expected Return [IndexFunds.com, 20Nov01] Superb stock market gains of the second half of the 20th century imply that future expected returns will be much more modest.

Three Odysseys [BFMRC, 15Nov01] The Long Adventurous Journeys of the Stock Market, the Mutual Fund Industry, and Vanguard

Since 1984, stocks, as measured by the S&P 500 Index, have provided a 16.3% return. The average equity mutual fund turned in a return of 13.1%—3.2 percentage points less... FORBES magazine's recent list of the 400 Richest Americans gives us some idea of how well fund managers do. The list includes 15 billionaires (or, in fairness, near billionaires) whose wealth is derived from the profits they have made by managing other people's money—an average nest-egg of $2 billion.

The Road Less Travelled [IndexFunds.com, 14Nov01] More evidence that low cost indexing beats active management the vast majority of the time and that the few funds that do manage to outperform rarely do so for long.

Don't Give Up on Index Funds [Washington Post, 11Nov01] Believing that active managers can stem losses during a bear market is "the biggest urban myth since the alligators in the sewers of New York City," said John Woerth, a spokesman for Vanguard...While about half of actively managed funds are beating the index this year, for 10 years the average drops to 25 percent, according to Morningstar. For the decade that ended Oct. 31, actively managed funds averaged a 10.9 percent annualized return, Morningstar said, but the S&P 500 returned 12.8 percent.

Mutual Fund Industry Wants it Both Ways [Fund Library, 07Nov01], A surprising salvo on MERs [Financial Post, 08Nov01] and Outrage builds over fund fees [Financial Post, 13Nov01] "Consumers should be outraged" at discount brokers who continue to sell only A-class shares of mutual funds to DIY investors in order to "earn" an up-to 1% trailer fee while providing none of the "advice, wisdom, counsel, and guidance" for which that fee is supposed to pay.

TD to unveil two additions to ETF club [Financial Post, 08Nov01] and New ETFs to be available soon [Globe & Mail, 08Nov01] "TD Asset Management is preparing to launch two exchange-traded mutual funds over the next two months, based on new indexes to be unveiled today by Dow Jones, the head of the bank's mutual fund arm said. The two new indexes, dubbed the Dow Jones Topcap Canada Value and Topcap Canada Growth will be the first of their kind in Canada."

The Problems with Monte Carlo Simulation [Journal of Financial Planning, Nov01] "explores the reasons why implementing Monte Carlo simulation is very difficult at best and can lead to incorrect decisions at worst. The problem is that the typical assumption set used in Monte Carlo simulation assumes normal distributions and correlation coefficients of zero, neither of which are typical in the world of financial markets."

In Such Turbulent Market Conditions, It's Important to Control Your Portfolio [Wall Street Journal, 04Nov01 if link has expired, search Archive for "clements" then select Nov. 4] First establish an asset allocation with which you're comfortable. Then rebalance to your target allocation by selling "high" and buying "low."

TIPS and Retirement Withdrawal Rates [Scott Burns, 04Nov01] Real return bonds let you increase your safe withdrawal rate by ½% to 1% according to John Greaney's analysis, The 4% Withdrawal in Bad Times.

Three Challenges of Investing [Bogle Financial Markets Research Center, 21Oct01] On active management, market efficiency, and selecting managers:

Conceptually, there's no reason to debate whether or not passive management beats active management. Passive must win. Why? Because if we take all stocks as a group, or any discrete aggregation of stocks in a particular style, an index that holds all of those stocks at their market capitalization weights will precisely track their return. Therefore the index must, and will, outpace the return of the totality of investors who own that same aggregation of stocks, but incur management fees, administrative costs, trading costs, taxes, and sales charges.

As a group, active managers will fall short of the index return by the exact amount of the costs that they incur. The central fact of investing, then, is this simple proposition: Investment success is defined by the allocation of financial market returns—stocks, bonds, and money market instruments alike—between investors and financial intermediaries. Gross return minus cost equals net return. If the data we have available to us do not reflect that self-evident truth, well, the data are wrong.

October 2001

Seeking a Cure for Portfolio Pain? Try Some Perspective [Vanguard, 30Oct01] Vanguard Chairman John Brennan advises investors to know thyself, ignore headline noise and stay the course.

Ottawa clamps down on tax havens [Investment Executive, Oct01] Thanks in part to last year's campaign, the new rules that govern the taxation of foreign mutual funds, ETFs and other trusts won't apply to US-based funds and stocks.

Mutual funds or publicly traded investment funds such as closed-end funds or British unit trusts are exempt from FIE rules as long as they distribute at least 90% of their income within 120 days of the end of the year. Thus, exchange-traded funds, ETFs, are not considered FIEs.

Independent advisers may be worth the fees [Toronto Star, 26Oct01] Fee-only advisers "want to be paid for their time, rather than burying the cost in commissions for product sales. That's good for clients who insist on advice with no hidden agendas."

Three Challenges of Investing [Bogle Financial Markets Research Center, 21Oct01] On active management, market efficiency, and selecting managers:

Conceptually, there's no reason to debate whether or not passive management beats active management. Passive must win. Why? Because if we take all stocks as a group, or any discrete aggregation of stocks in a particular style, an index that holds all of those stocks at their market capitalization weights will precisely track their return. Therefore the index must, and will, outpace the return of the totality of investors who own that same aggregation of stocks, but incur management fees, administrative costs, trading costs, taxes, and sales charges.

As a group, active managers will fall short of the index return by the exact amount of the costs that they incur. The central fact of investing, then, is this simple proposition: Investment success is defined by the allocation of financial market returns—stocks, bonds, and money market instruments alike—between investors and financial intermediaries. Gross return minus cost equals net return. If the data we have available to us do not reflect that self-evident truth, well, the data are wrong.

Perfect time to realize tax losses [Financial Post, 20Oct01] As painful as this year's stock market losses may be there's a silver lining -- especially if you have capital gains from the previous three tax years.

The trouble with ETFs [Globe & Mail, 20Oct01] is that they (and indexing) seem to get undeserved bad press in down markets.

Where Are the Markets Headed Over the Next 10-Year Period? [Wall Street Journal, 14Oct01 if link has expired, search Archive for "clements" then select Oct. 14] "It's really bizarre that so much ink and air are devoted to next month and next year, when what really matters are returns over the next generation." And the outlook for the next 10 years isn't all that rosy.

The Myth About Cross-Border Trades [National Post, 06Oct01] U.S. laws do protect Canadians with accounts south of the border.

The Index Fund Advantage: Low-Cost Passive Investing [AAII, Oct01] A nice summary of why indexing is a good way to get rich slowly.

Many people have the mistaken conception that it is necessary to outperform the market to get rich. However, you can do very well if you simply combine your patience and discipline with the market’s return. ... By avoiding risky investment bets and being a penny-pincher with fund costs, you stand a better chance of building a substantial nest egg through the magic of compounding.

September 2001

At first, Morgan [Bogle's mentor] was appalled to see that his disciple had embraced indexing, which amounted almost to another religion. "He regarded it as apostasy," says Bogle. "He'd say, 'Why would you do a thing like that? How can no management be better than management?'" But as indexing proved its worth, Morgan--who died at the age of 100 in 1998--was transformed into "a real convert," says Bogle. "He was dazzled by indexing. He would say, 'How did you figure it all out? It's a miracle.'"

Our future stock shock: Not so great expectations [Scott Burns, 09Sep01] Some alternative investment suggestions in an era of reduced expected stock returns.

Vanguard founder takes aim at 'perverse' industry [Australian Financial Review, 01Sep01] A great summary of the gospel according to St. Jack as he looks back on 50 years in the industry and 25 years of indexing. A must read.

[Bogle] estimates that about half of what the funds management industry takes out in fees is pure profit, running at more than $30 billion a year. ... His message to the average investor is simple: remove what costs and risks you can and invest for the long term. When you invest in stocks, there are four risks: individual stock risk, style risk (growth versus value), manager risk (right style, wrong manager) and market risk, he says. "My view is that you should eliminate the first three risks by buying an index fund because the fourth risk is quite large enough, thank you." ... Bogle also points to the huge range of investment options being offered to investors in retirement savings funds, and their ability to switch from one to another over the phone. "There's a myth around that the more choice you have, the better you'll do," he says. "I think it's an arguable proposition that the less choice you have, the better you'll do."

Efficient Frontier • Fall 2001 [Sep01] issue is now available. Good news: It seems the ETF gang can shoot straight after all. Bad news: Both war and peace could seriously mess up your financial plans.

Dueling Wall Street Gurus, but Friends Too [NY Times, 02Sep01] A profile of opposites, Robert Shiller, who thinks "market declines ... will be common in coming years [and] that there is no guarantee that the United States and its companies will be as successful in coming years as they were in the past," and Jeremy Siegel, who believes "the stock market has been undervalued for almost two centuries, that stocks deserve higher price-to-earnings ratios than they have had historically, because many people now understand their benefits and because the economy is less volatile than it once was."

August 2001

25 Years of Indexing [CNNfn, 29Aug01] A retropsective by Money magazine's Jason Zweig and an interview with Vanguard's indexing guru Gus Sauter.

I don't know, I don't care [CNNMoney, 29Aug01] "With an index fund, you're on permanent auto-pilot: you will always get what the market is willing to give, no more and no less. By enabling me to say 'I don't know, and I don't care,' my index fund has liberated me from the feeling that I need to forecast what the market is about to do. That gives me more time and mental energy for the important things in life, like playing with my kids and working in my garden."

Happy 25th for Vanguard 500 [CBS MarketWatch, 29Aug01] Paul Farrell summarizes the remarkable, yet stormy, history of the first index mutual fund.

25 Years Later: Original Vanguard 500 Index Fund Investors Stay the Course [Vanguard, 28Aug01] Some of the original investors in the first index mutual fund review their decision. [For more about money manager Ted Aronson's decision to invest his family's money in Vanguard index funds, see this interview.]

An Investing "Folly" Turns 25 [Vanguard, 23Aug01] Vanguard begins celebrations of the 25th anniversary of the first retail index mutual fund.

Although indexing has demonstrated its worth, most investors continue to rely on actively managed portfolios—whether in mutual funds or large institutional portfolios such as pension or endowment funds. However, Mr. Sauter believes indexing will continue to grow in acceptance. It's not surprising, he said, that it takes time for investors to embrace the idea. "It's not at all intuitive to think that the market will beat the average manager," he said. "Most people's intuition is the other way. Ironically, although indexing seems to be a simple strategy—and it can simplify the investor's life—I think you can make an argument that index investors are frequently the savviest investors. You really have to understand the workings of the market to understand why indexing is a winning strategy."

Words of wisdom from Vanguard's Saint Jack [Boston Globe, 19Aug01] Another interview with Jack Bogle. [See also this Morningstar conversation.] His advice to skittish investors:

"Don't expect so much and you won't be disappointed. Be reasonable about things. And think about bonds." Asset-allocation plans "are not guaranteed to make you rich. What they are guaranteed to do is make you avoid terrible accidents. If you can go through an investment lifetime without terrible accidents, you're going to do pretty well."

A sucker is born every minute: Ask mutual fund owners [Globe & Mail, 18Aug01] Eric Reguly "gets it." Do you? [note: Dan Hallett of Sterling Mutuals points out that starting in 2000 fund companies have been required to include the 7% GST in their MERs. Could this alone (2.32% x 1.07 = 2.48) explain the increase? Stay tuned.]

You would think that MERs should fall when the fund falls. Not so. You would also think that the MER would drop as the fund grows in size, because the cost of managing each dollar of fund assets declines as total assets increase. Forget it. ... At the end of June, the average MER for Canadian equity funds was 2.51 per cent compared with 2.32 per cent a year earlier.

Bylo rebuts  Investment Café [15Aug01, The Fund Library] Pundit Steve Kangas, quoting Investors Business Daily, sets out to expose the flaws of indexing. Bylo sets out to expose the flaws in Steve's "exposé."

New Dow Jones indexes should give ETFs more style [Globe & Mail, 14Aug01] Dow Jones is creating Value and Growth "slices" of its Canada Total Market Index, "which is similar to the TSE 300 composite index" and then plans to introduce ETFs based on them.

Stop Making Sense, Start Making Money [Wall Street Journal, 05Aug01 if link has expired, search Archive for "clements" then select Aug. 5] Much of life's "conventional wisdom" can be harmful when applied to investing. One example:

"In general in life, the harder you try, the better you do," Mr. Odean, the U.C. Davis professor, says. "But when investing in stocks, it turns out that you're often better off taking the path of least effort," and simply buying and holding a diverse collection of low-cost funds.

Here come the Bogleheads [Money, Aug01] Jason Zweig provides comprehensive coverage of the Vanguard Diehards II gettogether in June and our meeting with Jack Bogle at Vanguard headquarters.

July 2001

Investors Cling to Managed Funds Despite Performance of Indexing [Wall Street Journal, 29Jul01 if link has expired, search Archive for "clements" then select Jul. 29] Jonathan Clements refutes several self-serving myths that the investment industry uses to promote active management over indexing.

"Wall Street is playing to the prejudices of investors," says Meir Statman, a finance professor at Santa Clara University in California. "It feeds into our sense of how the world works. We see the market as a game of skill, rather than a game of luck. We want to believe that people who choose stocks carefully do better."

How The Price You Pay Impacts Returns [IndexFunds.com, 26Jul01] Larry Swedroe examines historical equity returns following periods of high P/E ratios (or low equity risk premiums.) He finds it "very hard to see a scenario of high returns for large growth stocks when prices being paid for future earnings are so high."

Mercer Bullard of Fund Democracy [Morningstar, 24Jul01] answers questions about mutual fund shareholders' rights issues. For more from Mr. Bullard, see Fund Democracy and his columns at TheStreet.com.

That boring fund statistic is all about value for money [Globe & Mail, 19Jul01] It may be hard to ignore 2.5% MERs when equity returns are negative, but don't expect the fund industry to share in your pain. "Assets are increasing, but expenses are going up," Ms. Abboud wrote in an analysis. "Yet, instead of sharing at least some of this benefit with their unitholders, most fund companies tend to keep all the benefit for themselves."

Jason Zweig & Ken Myers Discuss Indexing [Morningstar, 09Jul01] From a conversation between journalist Jason Zweig and Ken Myers at the recent Diehards II gettogether:

As I traipse around the country speaking to investing groups, or just stay in my cage writing my articles, I'm often accused of 'disempowering' people because I refuse to give any credence to anyone's hope of beating the market. The knowledge that I don't need to know anything is an incredibly profound form of knowledge. Personally, I think it's the ultimate form of empowerment. You can't tune out the massive industry of investment prediction unless you want to; otherwise, you'll never have the fortitude to stop listening. But if you can plug your ears to every attempt (by anyone) to predict what the markets will do, you will outperform nearly every other investor alive over the long run. Only the mantra of "I don't know, and I don't care" will get you there.

Morningstar Celebrates John Bogle [Morningstar, 02Jul01] Links to many articles in appreciation of Vanguard founder Jack Bogle, who this week marks his 50th year in the mutual fund industry. See especially Russel Kinnel Speaks with Jack Bogle:

I think what really drives me is to make sure that the mutual fund investor gets a fair shake. Obviously it’s a mission that’s a lot of fun, in part, because as far as I know nobody else is doing it.

And the interesting thing is that nobody is denying my arguments about indexing and the industry’s failings. I don’t get calls saying, "You’ve now gone too far. Let’s have a debate, let’s have a town hall, let’s do it on television." Such an offer has never been made to me by another fund firm, although such an offer has been made to me by the way by sponsors of meetings. And I say, well, if you can get me somebody to debate with, of course I’ll do it. The phone doesn’t ring again, though, because nobody wants to get into the arena but me.

Kudos CIBC! [CIBC, 01Jul01] Starting with the period from 01Mar01 to 30Jun01, CIBC have started to pay quarterly MER rebates to investors who hold at least $150k in CIBC index funds in a combination of taxable, RRSP, individual, joint, etc. accounts. The accounts can even be held at different institutions.

June 2001

CanDeal [27Jun01] CanDeal will provide a transparent, real-time market for trading in Canadian bonds and other fixed income securities. Retail investors will access the CanDeal system starting in the 4Q01 through most investment dealers. The initial market will be restricted to Canadian government bonds and T-Bills.

Taxes Matter [NY Times, registration required but free, 24Jun01] Taxes have a great impact on investors' net returns but most mutual fund managers simply don't care:

the S.E.C. estimates that taxes knock off anywhere from 2.5 to 5.6 percentage points from annual fund returns. For some funds, the discrepancy is much larger. ... Portfolio managers usually do not worry much about the taxes they pass on to investors because about half of their investors' assets, on average, are parked in tax-sheltered retirement accounts, Mr. [Joel] Dickson [of Vanguard] said. ... Then too, portfolio managers have scant personal reason to focus on the tax implications of stock sales: typically, they are compensated on the basis of pretax performance, according to Russel Kinnel, director of fund analysis at Morningstar. "It's amazing how little managers know about their own fund's tax situation," Mr. Kinnel said. "They really don't care."

Developing a long-term investment plan [Morningstar, 20Jun01] Discussion forum participant "El Toro" has created a wonderful summary of basic information with which every independent investor should become familiar. While this material is oriented to US investors much of it applies to Canadians as well. See also the latest instalment on using a Reverse mortgage to supplement income during retirement.

The regulators save the day [National Post, 20Jun01] Provincial securities regulators "protect" Canadian investors from US discount brokers who offer dramatically lower stock trading fees and provide access to lower cost US mutual funds.

Efficient Frontier • Summer 2001 [Jun01] issue is now available. Highlights include links to video interviews with Gene Fama, Ken French, Rex Sinquefield and other passive investing notables.

Bogleheads Transcend Cyberspace [Morningstar, 14Jun01] Sue Stevens reports on Diehards II. See also Morningstar forum threads: 1 • 2 • 3 • 4 et al, as well as the photo gallery: 1 • 2.

Vanguard scores with ETF share class [CBS MarketWatch, 14Jun01] Vanguard's Gus Sauter discusses the new VIPERs Total Stock Market ETF, how it differs from other ETFs and plans to introduce more ETFs.

Is the S&P rigged? [Money, 13Jun01] Jason Zweig warns that the S&P 500 index committee, by eschewing profitable "old economy" stocks for overpriced high-technology stocks, have cost investors billions of dollars in recent years.

Their money, their hero [Philadelphia Inquirer, 12Jun01] Vanguard Diehards get the opportunity to meet their hero, Jack Bogle, at Vanguard headquarters.

Sorry to Spoil the Fun [Fortune, 11Jun01] Shawn Tully contends that the rate of growth of corporate profits is unsustainable. The only issue is, will the market correct catastrophically, or are we in for a lengthy period of meager equity returns?

Stocks for the Long Run? [IndexFunds.com, 05Jun01] Steve Evanson cautions that the "long run" may be a lot longer than many people think. Moreover, the time when one enters the stock market can have a substantial impact on total returns. Equities -- not just the S&P 500 -- don't always outperform everything else.

May 2001

Gaining Investment Wisdom From Neurologist in Oregon [Wall Street Journal, if link has expired, search Archive for "clements" then select May. 27] Jonathan Clements profiles Bill Bernstein of Efficient Frontier and summarizes his views about the roles of gold, indexing, global diversification and dividends in an investment portfolio.

Wall Street's wisest man [Money, 18May01] Jason Zweig interviews investment veteran and author of Winning the Loser's Game, Charles Ellis. "Benign neglect is the secret to long-term investing success. If you change your investment policy, you are likely to be wrong; if you change it with a sense of urgency, you're guaranteed to be wrong."

Greed and glory on Bay St. [Toronto Star, 12-13May01] "Holoday had swindled millions of dollars from clients, friends and relatives during a three-year romp. Police called it one of the biggest known frauds involving an individual broker in Canadian history." And he managed to do it right under the noses of his employers and industry regulators.

Can you retire early? [MoneySense, May01] You may be able to retire sooner than you think. This set of articles helps you determine how much you'll need, what the government brings to your retirement party, and how to make it all last longer than you do.

Portfolio turnover brings a tax hit [Globe and Mail, 12May01] Tim Cestnick cites a 1996 study that "showed that an average Canadian equity fund, with turnover of 80 per cent annually, would have to outperform a low-turnover fund by between 2 and 5 per cent before taxes annually over a 20-year period just to compensate for the taxes resulting from the higher turnover."

More on the "Nortel disaster" [06May01] According to their website, Nortel closed on 03May01 at CA$24.45 per share. The split-adjusted share prices of Nortel 5, 10 and 15 years ago were $8.78, $5.17 and $2.61, respectively. The compounded annual returns over those periods, ignoring dividends, were 22.7%, 16.9% and 16.1%. For comparison, the TSE 100 index CARs, including dividends, were 11.0% over both 5 and 10 years ending 30Apr01 and 10.9% over 15 years ending 31Dec00. Some disaster!

April 2001

Say It Loud: They're Average and Proud [Fortune, 30Apr01] A formula based on indexing, low fees, and the Internet could soon make Vanguard the largest mutual funds company on earth.

The Twelve Pillars of Wisdom [Bogle Financial Markets Research Center, 27Apr01] "Lessons We Should Have Learned before the Bear Market Arrived, but are Only Learning Now." Jack Bogle's advice may be old, but it's ageless -- and its value is priceless.

Jack Bogle inducted into Wall $treet Week Hall of Fame [27Apr01] Finally! Louis Rukeyser has inducted Vanguard's founder and chairman emeritus, Jack Bogle, into the Wall $treet Week Hall of Fame.

 Uncle Lou on Saint Jack

Indexing Prevails In "Stock Picker's" Market [Vanguard, 20Apr01] Even if we're now in what Wall Street calls a "stock picker's market," the stock pickers have little substantive to crow about.

Bogy Beaters: Index Funds That Edge Their Indexes [Morningstar, 19Apr01] Index funds managed by Vanguard's Gus Sauter have a reputation for actually beating the indexes that they're supposed to track. Sauter uses a variety of techniques, some of which are proprietary.

10 Questions With Financial Planner Frank Armstrong [TheStreet.com, 18Apr01] The author of Investment Strategies for the 21st Century answers questions on a variety of investing topics.

A wakeup call for fund investors [National Post, 17Apr01] Jon Chevreau notes that one benefit from the end of the bull market's double-digit returns is greater investor awareness of the importance of asset allocation, cost minimization, and industry transparency.

A Tale of Two Markets [Vanguard, 16Apr01] John Bogle looks back on the creation and implosion of the NASDAQ bubble, reminds us that traditional stock market valuation models continue to apply notwithstanding the "New Economy," and urges investors to take a longterm perspective.

Tax Tips for Fund Investors [IndexFunds.com, 11Apr01] Dan Hallett provides timely information on how to calculate tax owed on fixed income, stock and mutual fund investments.

Why the Critics of Index Funds Are Wrong [IndexFunds.com, 06Apr01] Market downturns always seem to elicit renewed claims that indexing has failed. Here again are the standard rebuttals to the standard arguments.

Ten investment axioms to live by [CBSMarketWatch, 06Apr01] Marshall Loeb provides 10 rules for achieving investment success. But he left out the most important one: Costs matter!

'Random Walk' author prefers bonds, REITs [National Post, 04Apr01] and
Legendary author still offering sound advice [Toronto Star, 11Apr01]
Princeton Prof. Burton Malkiel, author of A Random Walk Down Wall Street told an audience at the Bonham Centre for Finance (Rotman School of Management at the University of Toronto) that the heady days of double-digit stock market returns are over. Prudent investors should diversify into bonds, including real return bonds, real estate investment trusts (REITS) and high-yield "but not real junk" bonds. He also characterized the hucksterism that goes for analysis and journalism on Wall Street as "financial pornography" -- a bold move considering that his lecture was funded by an endowment that was made possible by selling mutual funds with 2½% to 3% MERs.

Efficient Frontier • Spring 2001 [Apr01] issue is now available. It should disabuse those with the notion that the current market correction has brought stock prices down to a "reasonable" level.

March 2001

Dear Bylo [29Mar01] Bylo answers your questions by e-mail. Ask away, but don't expect to get only the answers you want to hear.

Misinformed Market Talk Abounds As Indexes Drift Further Downward [Wall Street Journal, Search on "clements" then select Mar. 25] Jonathan Clements exposes four myths that are now making the rounds, in particular, that investors are too stupid to do it themselves:

Wall Street is the only business in America where it's considered perfectly acceptable to proclaim that your customers and potential customers are idiots. And right now, the bashing of small investors is at full volume.

The scornful comments from full-service brokers and financial planners are, of course, entirely self-serving. The 1990s saw the rise of do-it-yourself investors, who make their own investment decisions using no-load mutual funds and discount brokers. Now, full-service brokers and financial planners are hoping to reclaim these lost clients.

"It's easy to make money in a bull market," goes the argument. "But to make money in all markets, you really need a good broker or financial planner."

Convinced? I'm not. Do-it-yourself investors don't have a monopoly on foolishness. Most Wall Street professionals also fail to generate market-beating results, because they can't overcome the burden of their own investment costs.

Moreover, as all the horror stories make clear, Wall Street's ranks include some crooked brokers and planners. If small investors are indeed so profoundly ignorant, how could they possibly distinguish the good advisers from the bad? Maybe these investors are better off on their own, rather than risk falling into the clutches of a crooked adviser.

What to make of all this? The reality is, most investors don't hire brokers and planners because they are too dumb to invest on their own. Instead, these folks sign on with advisers because they don't want to expend the time and effort that comes with managing their own money. And maybe even more investors would turn to brokers and planners, if these advisers spent more time helping investors -- and less time disparaging them.

After the Fall: What's Next for the Stock Market and the Mutual Fund Industry? [21Mar01] In an address to the National Press Club in Washington, Vanguard founder John Bogle says that while the current bear market hasn't yet reached bottom, "it is a blessing because investors will be buying based on sound prices rather than inflated ones."

 Hear Mr. Bogle's speech or view it using RealPlayer.

John Bogle to investors: Chill [CBS MarketWatch, 21Mar01] In an interview with Justin Wiser, Vanguard's Chaiman Emeritus advises investors to do what he's always advised them to do: Stay the course.

Yes, fees are low but ETFs have some drawbacks [National Post, 21Mar01] One might conclude from all the attention ETFs have been getting that they're the perfect investment. Jon Chevreau warns that they also come with some significant disadvantages.

Investors benefit from ascent of ETFs [Globe & Mail, 20Mar01] Rob Carrick looks at some of the challenges that ETFs present to the conventional mutual fund and financial advisory industries.

Indexing the Total Stock Market [Vanguard, 15Mar01] Gus Sauter discusses the advantages of US total stock market index funds (in Canada, CIBC's US Equity index fund) and international diversification. He also emphasises the importance of portfolio allocation among stocks, bonds and cash in achieving one's financial goals at minimum risk.

February 2001

"It is not that you cannot win" or beat the market, said Larry Swedroe, a principal of Buckingham Asset Management in St. Louis, Mo. "It is that the odds of winning are so low that it doesn't pay to play." ... "The evidence demonstrates that the costs of trying to exploit any anomaly or inefficiency have proven to be greater than the likely benefit," Swedroe said. "It is just a loser's game." ...

So why does[sic] the vast majority of investors choose actively managed funds even though, on average, such funds trail their benchmarks by almost 2 percent a year before taxes, and 3 percent after taxes? Why do they keep chasing after the "hot" funds, when the evidence also demonstrates that past market-beating performance does not predict future success? Because they are seeking the Holy Grail, a portfolio that will outperform the market, Swedroe said. If it does, they can congratulate themselves for being smart and picking the right fund or fund manager. And if it doesn't, they can blame the manager. "They never blame themselves," Swedroe. "From a psychological point of view it is a win-win." ...

the winning strategy is to put together a globally diversified portfolio of passively managed, low-cost index funds that merely attempt to match the return of their benchmarks

Retirement Models That Let Reality Bite [Wall Street Journal, 20Feb01] Jonathan Clements discusses the pitfalls of using "deterministic" calculations to plan for retirement. "Probabalistic" models may be less precise but they're also more realistic and useful.

Rumours of indexing's demise are greatly exaggerated [17Feb01] Nortel's fall from grace over the past few months has prompted many investment industry pundits to proclaim the failure of indexing. Let's put Nortel and indexing into some perspective, debunk the industry's self-serving investment pornography and see what lessons we can learn:

Myth: Nortel's fall is a disaster.
Fact: NT's share price is now where it was in the fall of 1999, less than a year and a half ago. Is that good? No. Is that a disaster? Only if you placed a large bet on NT late in a speculative mania.
Lesson: People who put all their eggs in a red-hot basket end up with a burned omelette.

Myth: Nortel's effect on the TSE indexes "proves" that indexing doesn't work.
Fact: The ETF XIU, which tracks the S&P/TSE 60 -- the index that's most concentrated in NT -- came on the market in October 1999 at about $41 a share. It closed on Friday at $48.70. Despite the so-called "Nortel Effect" the index grew about 18% plus dividends during that period.
Fact: The FPX Growth index, although comprised 35% of XIU, has fallen only 2.6% year-to-date. The FPX Balanced index, with 25% in XIU, is down 1.7% this year. Meanwhile most world stock markets, struggling on recession rumours, are also down this year.
Lesson: A conservative, diversified buy-and-hold investment strategy wins in the long run.
Lesson: If a 2% drop "hurts" then investing -- active or passive -- is not for you.

Tax on windfall gain upsets fund investor [Toronto Star, 16Feb01] So you think S&P 500 index funds are inherently tax efficient? Then read how one such fund managed to make a 28% capital gains distribution last year while at the same time losing almost 6% in market value.

Exuberance Is Rational [New York Times, 11Feb01] Roger Lowenstein profiles Richard Thaler, one of the pioneers of so-called behavioural economics, the study of why people often behave irrationally with their money.

What "Nortel Effect"? [10Feb01] Last year the large cap TSE 60 and the broader TSE 300 indexes underperformed most actively-managed mutual funds. This was attributed to indexing's fallability when a single stock like Nortel Networks, (which at one point represented 45% of the TSE 60's market cap), dominates an index. But what happens when we look back, not one, but two years?

Fund or Index	2000	1999	2-yr CAR
TSE 60 Index	8.0%	34.2%	20.4%
TSE 300 Index	7.4%	31.7%	19%
Median Canadian Equity Fund	11%	21%	15.9%
"Overall" Canadian Equity Fund	11%	16%	13.5%

Data from Financial Post 15-year Mutual Fund Review for 31Dec00

Performance of Index vs Active Portfolios A 15-year (ending 31Dec00) performance comparison between portfolios comprised of the median actively managed funds versus similarly weighted portfolios of indexes (minus an "MER" of 0.50%). How does your portfolio measure up?

Overconfidence Can Take a Big Bite Out of Your Investment Returns [Wall Street Journal, 04Feb01] Jonathan Clements reviews behavioural finance research into investor overconfidence. Warning: Hubris may be detrimental to your financial health. [To access article, click on above link, search on clements, then select the item dated "Feb. 4".]

January 2001

From The 'mating of high-fee dinosaurs' [National Post, 30Jan01] comes this disturbing observation:

One unnamed advisor recalls a conference where U.S. fund executives marvelled at the high MERs of Canadian fund companies and their resulting profitability. "The Canadian mutual fund industry is the envy of the entire world," he said.

Be cheap, retire rich [Financial Post, 27Jan01] When making financial plans for retirement be sure it's your retirement that you're providing for. Tracy LeMay and Glorianne Stromberg use a mutual fund fee impact calculator to drive home the importance of minimizing fund management fees.

The Big Slice [Globe and Mail, 26Jan01] Daniel Stoffman shows how a mere 2% MER can eat a substantial part of your portfolio's returns. And that doesn't include such hidden costs as brokerage fees, bid/ask spreads and market impact.

The lesson from all this is that mutual funds are an expensive way to invest. A major reason they are expensive is that the mutual fund industry sees itself as a marketer of financial "products" that have to be aggressively sold. The fund industry is one of the biggest advertisers on television. Most of that advertising is concentrated at the start of the year as the annual March 1 tax deadline for RRSP contributions approaches.

What Can Active Managers Learn from Index Funds? [Bogle Financial Markets Research Center, Jan01] From Mr. Bogle's speech to the Canadian mutual fund industry last December:

it's up to true investment professionals to place far more emphasis on the stewardship of the assets entrusted to them by their clients and far less emphasis on responding to transitory stock market trends and seemingly-compelling near-term marketing opportunities. There is a line between the profession of investing other people's money and the business of marketing financial products. That it is an invisible, subtle line, however, doesn't mean it is non-existent. And when we cross that line, we have a lot to answer for.

The best way for the true professional to keep from crossing that line is to pay simple homage to the timeless truth of the financial markets. ... The investment success of investors in the aggregate is defined—-not only over the long-term, but every single day—by the extent to which market returns are consumed by financial intermediaries. Index funds need not be the only answer, for there is no reason that managed funds that model their strategies, shape their portfolios, moderate their transaction activity, and improve their pricing cannot take advantage of the simple disciplines that have served index investors so well.

A Better Way to Size Up Your Nest Egg [Business Week, 22Jan01] is a nice summary of why Monte Carlo simulations provide better projections than traditional, constant rates of return calculations. Read this before you read The Retirement Calculator From Hell, below.

An aggressive twist on a passive strategy [National Post, 18Jan01] Rudy Luukko discusses new index funds and ETFs that target narrow market sectors or regions. But "If you believe in the philosophy of indexing, you should index the broadest market possible," says Ted Cadsby, president and chief executive of CIBC Securities. "Otherwise you're making a bet on different sectors or stocks." On where to index: "There aren't any markets where I would say: Don't index," notes Mr. Cadsby. "There's no market where you can say definitively that every active manager is going to beat the index." [A bit of a change from his book, The Power of Index Funds, where Mr. Cadsby contends that indexing doesn't work in small cap and less developed markets. :-)]

Efficient Frontier • Winter 2001 [Jan01] issue is now available. In The Retirement Calculator From Hell - Part II, Bill Bernstein argues that under "new paradigm" assumptions, (real returns of 4.5% for stocks and 3.5% for bonds), sustainable withdrawal rates must be reduced and the weighting of bonds must be increased in order to maximize the chance of success.

What Wall Street Doesn't Want You to Know: How You Can Build Real Wealth Investing in Index Funds [IndexFunds.com, 16Jan01] reviews the new book by Larry Swedroe and interviews the author.

A Trip Down Memory Lane [Investor Solutions] Frank Armstrong reviews the returns of various asset classes over the past 30 years. He concludes that "while nothing is ever guaranteed in the world’s equity markets, a well-diversified portfolio has the highest chance of a satisfactory result over both the long and shorter terms."

Callan Periodic Table of Investment Returns [ PDF, Jan01] is a comprehensive representation of relative asset class performance over the last 20 years. It depicts annual returns for eight asset classes, from 1981 to 2000, ranked from best to worst. Well-known, industry-standard market indexes are used as proxies for each asset class.