Is there anything positive re mutual funds?

[spirit]

First of all I want to say that I(along with my husband) am only an investor and not affiliated with any mutual fund company. Actually I am a high school teacher. 30 years ago I started buying mutual funds from a retired teacher. I will admit that I started small ($50/month) but that increased with time. She retired a few years ago and recommended we give our account to someone she considered very ethical and we did. Remember that trust was paramount throughout these years. I believed that they were experts and made informed decisions on my behalf. I had no time or interest in doing their jobs. However, I believed I was a good consumer who researched major purchases such as cars etc. but I placed good mutual fund management as having some value and was willing to pay for it. I also kept about 1/2 my money in fixed income such as GIC's because I didn't totally trust the stock market. I have not sold any mutual funds because I believe the fundamentals are still valid. With all the mounting concern over the financial markets is the mutual fund model dead for the future? I would like to hear from those in the business justify their knowledge is worth my loyalty.

[Rickson9]

No offense but a few comments that you made got me stumped (which isn't hard to do btw):


I believed that they were experts and made informed decisions on my behalf. I had no time or interest in doing their jobs.


I have not sold any mutual funds because I believe the fundamentals are still valid.

If you do not understand interpreting financial statements (and or making informed decisions) how can you determine if the "fundamentals are still valid"?


With all the mounting concern over the financial markets is the mutual fund model dead for the future? I would like to hear from those in the business justify their knowledge is worth my loyalty.

Canadian mutual funds are well known throughout the world as being the highest fees and, consequently a horrible 'investment'.

http://network.nationalpost.com/np/blogs/wealthyboomer/archive/2009/05/13/u-s-mutual-funds-get-overall-quot-a-quot-in-morningstar-study-of-16-countries-canada-flunks-for-high-fees.aspx

In general, a 2.5% MER fund (which is the average expense ratio) will take off half of your investment results every 3.5 decades. In other words, if you started investing at the age of 30 and were supposed to retire at the age of 65 with $1M, if you had invested in a 2.5% MER fund (there are many many Canadian funds that have far higher fees) you would only have $500,000 (or less).

You can think of this in the opposite manner - if you are retired after investing in a 2.5% MER fund in your 30s, whatever you end up with should have been double what it is. Thus, if you are standing at $500,000 at retirement, you should have had $1M.

Half my retirement take is too much to pay for any advisor. This is why my wife and I do not use financial planners - we would rather keep the $500,000.

From the aforementioned article,
"Canada got a failing grade of F for its high fees, as Morningstar Canada reported on its web site here. On fees, Canada finished dead last, corroborating an earlier academic study by Harvard's Peter Tufano and two other finance professors. Morningstar found that Canada and Japan were the only countries in which the median MER for equity funds generally ranged between 2% and 2.5%. "We encourage fund companies in Canada and Japan to lower their fees and expenses for the benefit of the investors," Morningstar wrote."

However there it hope as it goes on to say,
"As I've pointed out before, it's very easy for Canadians to build portfolios for well under 0.5% annually all-in."

Don't hold your breath if you're waiting for your financial planner to put you into these low-cost options.

In addition, the vast (and I mean vast) majority of Canadians have no idea what the fees are on all of their funds. They can tell you how much they saved buying chicken on special, but they have no idea how many hundreds or thousands of dollars they've lost to fees on all their funds (but at least they had an inexpensive chicken dinner...)

My wife and I find it amusing that financial planners tell us to plan for retirement by investing in their funds - what they neglect to tell us is that it is *their* retirement that we're paying for! LOL

In Canada, an individual who has been placed into a mutual fund by an advisor should expect their returns to be slightly better than a savings account; and this is no exaggeration.

[Spidey]

I agree with much of Rickson's advice. You may want to read "The Four Pillars of Investing" by William Bernstein. Basically, the book outlines that low MER index funds outperform somewhere around 80% of higher MER managed mutual funds.

However, you should give yourself a pat on the back for some of your decisions. Keeping half your investments in GICs was probably a wise move particularly in light of the recent market meltdown. Also being a high school teacher means that you've got a healthy pension ahead of you.

As for your mutual funds -- you may want to consider placing them in the comparable index funds. For example if they are 100% Canadian equity funds, then pick a Canadian index fund to replace them -- perhaps the "TD CDN index - e" or an ETF. Or if they were, say, a combination of balanced funds and US and international equity then you may want to replace them with a comparable mix of CDN equity index, US equity index, International Index and bond index funds. Just off the top of my head, I would say that since you already have 50% of your savings in fixed income and a pension as well, a mix of 60% Cdn Index, 20% US index and 20% international index may be appropriate for the portion currently in mutual funds. If you want less volatility you can add bond index funds into the mix. Individual stocks would probably not be appropriate given what you've said regarding investing experience.

TD "e" index funds have MERs somewhere in the neighbourhood of .3%.
Index ETFs have MERs somewhere in the neighbourhood of .15- .25%

So say you have $100,000 and are currently paying a 2.5% MER. You will save over $2000 per year and probably get better performance.

All that being said, I would recommend reading the above book first.

[spirit]

Thank you to the both of you for your opinions. I must admit that since Oct. I have become an extremely interested watcher of BNN. Also most people I know who are my age (late 50's) felt the same way as I did re mutual funds. They were a vehicle (fairly safe we thought) to invest some of our money for the future without going full bore into the stock market buying individual stocks. Day trading was for those with time to research and a cast iron stomach to handle volatility. We did not want to start up a business or buy rental property. We had demanding careers of our own along with the demands of raising families. 30 years ago mutual funds were very attractive with their promises of investing in good companies in a manner designed to minimize risk. Now it is 30 years later and the times today are not just a normal bubble correction but a paradigm shift in the financial industry. (IMHO) I agree that with so many options out there for investing, the traditional mutual fund buyer is getting a great education on alternative financing. :eek: My own mutual fund advisor is taking courses on retirement investing to help her clients manage their retirement portfolios. Focus on managing retirement investment not building wealth. I don't have the stomach to pay 2.5 MER for the next 30 years:confused:and that is the reason for this post. I want to know how the mutual fund industry will be able to justify themselves to those like me who are looking at different ways to self manage their finances.

[Rickson9]

I want to know how the mutual fund industry will be able to justify themselves to those like me who are looking at different ways to self manage their finances.

The fund industry won't need to justify themselves for a long long time. They are very loosely regulated with regards to fee disclosure.

Nobody reads fund prospectuses from front to back anyway; and if they did I'm not convinced that they would find out all the fees involved.

As far as Canadians and mutual fund fees are concerned, investors apprently can't be bothered to ask their advisor (and if they did ask, there are many techniques to sidestep the issue) and it isn't in the advisor's interest to spend too much time talking about fees.

As long as the investor treats their mutual fund like a low interest savings account, they won't be disappointed. For example, in your case where you had a portion in GICs and a portion in mutual funds; you could basically treat your investment as 100% in GICs as far as long-term results are concerned.

As far as it being a paradigm shift; it really isn't. It only feels that way because human memory is so short. Cycles have always come and gone and everybody believes that this time is different (but it never is). If the only thing a person understood was index funds and the cycle of recession and prosperty they would do quite nicely over time.

In addition, I don't blame financial planners for doing what they do. I have friends who are financial planners and they do very well for themselves. If someone wanted to recommend a profession for their children, I would strongly recommend financial planning. Living off the fees from your customers is a very nice way to go, especially when you will have these customers for decades; it's like having the income of a surgeon without the liability.

[MoneyGal]

Whoa. I would never say you could relate to mutual funds as being "like a GIC." Mutual funds (and any equity investment) carry the risk of loss, while guaranteed products provide a guaranteed return.

I know what you are trying to communicate - you are saying the OP should not expect returns above fixed income on the MF part of her portfolio. However, the fixed income portion of her portfolio has a lower bound on returns, and the MF portion does not.

I'm no fan of mutual funds, however, the potential advantages of MFs include:

- low-cost diversification for small amounts (relative to buying individual stocks)

- a convenient way to implement portfolio tilts (i.e., value, small-cap)

- related to the tilt, a way to invest in specific sectors of the market in an attempt to get other than market returns

- active trading at low cost and with no time investment and little knowledge investment (relative to implementing an active trading strategy yourself)

- A way for investors with small portfolios to work with a licensed advisor

Some of these features are available using ETFs.

I'm strictly a DIY investor using ETFs and when I was a licensed advisor I used ETFs as well.

However, for some people, retail MFs are going to be their choice, because they are the most available and the most accessible (it is actually very difficult to find an advisor to implement an ETF portfolio for accounts of less than $250K).

For those people, who either can't or won't DIY, mutual funds provide a way to get exposure to the market. Yes, at high cost, and yes, I think costs matter (I think they are the number one factor in determining long-term investment success, actually). But even I sometimes buy milk at the convenience store. ;)

[Spidey]

I guess it should be mentioned as well, that there are some managed mutual funds that charge more reasonable MERs. Phillips Hager North (although now they have higher MER versions for financial planners) and Mawer come to mind.

The trouble is, commission based financial planners will never recommend low MER mutual funds because they get their income from trailer fees (a percentage of the MERS). This, in my mind, causes a huge conflict of interest because it is the high MER mutual funds that supply the best income to the financial planner.

[bpither]

I was a client of PH&N for years. They probably have the best fixed income team in the country but they have had mixed results in their US and Overseas funds. Everything got clobbered in the fall.

I became a client because at the time I believed that everything was expensive: real estate, most stocks and bonds. If you don't understand this and do not want to learn how to buy when an investment is good value then you can keep getting shafted by financial "advisers" and/or lose in the long run in lousy mutual funds.

You have to do your own investing, and when the time is right, when stocks are cheap and when there is good cash flow and a history of rising dividends in a non cyclical industry such as a utility or a pipeline strike with courage. In February Canadian banks were astoundingly cheap and as a long term investment you can not go wrong with Royal or TD. Doesn't matter about the short term gyrations - if you are in for 10 years you will be richly rewarded by rising dividends. By winter perpetual discount preferreds dropped 30 - 40% and at the best valuation since 93-94. They were steal and they are all positive and pay me between 6 and 8% which is equivalent to a 8 -10% payout from a bond.

It's a tough gig but I am so glad I took the plunge. In BC you can earn over $60,000 in dividends (not distributions which is what income trusts and mutual funds are all about) without paying tax (basic minimum of a couple of hundred dollars) http://www.conservativeinvesting.ca/pdf/tax_free_dividends.pdf ... and they are credits which mean you can offshoot other taxable income such as interest and distributions. Each province is different but BC is the best in the country.

For starters go to Tom Connolly's website "Dividend Growth" http://www.dividendgrowth.ca/dividendgrowth/. You'll never buy another mutual fund in your life.

You can also easily buy an ishares or Claymore ETF by opening an account with an online discount broker such as TD Waterhouse. That's what I do.

[Rickson9]

Whoa. I would never say you could relate to mutual funds as being "like a GIC." Mutual funds (and any equity investment) carry the risk of loss, while guaranteed products provide a guaranteed return.

I know what you are trying to communicate - you are saying the OP should not expect returns above fixed income on the MF part of her portfolio. However, the fixed income portion of her portfolio has a lower bound on returns, and the MF portion does not.

"...you could basically treat your investment as 100% in GICs as far as long-term results are concerned."

I wasn't talking about their respective risk profiles; but I think we both understand what each of us was trying to communicate.


I'm no fan of mutual funds, however, the potential advantages of MFs include:

- low-cost diversification for small amounts (relative to buying individual stocks)

Diversification has never been a benefit. This concept has been sold to Canadians by the fund industry. Diversification is a negative (and a very large negative at that).

"I was suffering from my chronic delusion that one good share is safer than ten bad ones, and I am always forgetting that hardly anyone else shares this particular delusion." - John Maynard Keynes, 1942

"The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it." - Warren Buffett, 1993 Chairman's Letter to Shareholders

"I have owned one stock since 1969, two since 1988 and one I started buying in 1986 or so. That's my portfolio. Six stocks. I once owned 17, but that was way too much." - Philip Fisher, Forbes



- a convenient way to implement portfolio tilts (i.e., value, small-cap)

All investing is value investing. If you aren't value investing, then you're probably just fooling around.

"The whole concept of dividing it up into 'value' and 'growth' strikes me as twaddle. It's convenient for a bunch of pension fund consultants to get fees prattling about and a way for one advisor to distinguish himself from another. But, to me, all intelligent investing is value investing."
- Charlie Munger

Disclaimer: my wife and I also own approximately 6 stocks and we have absolutely destroyed the returns of any diversified holding over the last decade. The discrepancy is so huge that speaking about diversification as an advantage is laughable to us.



- active trading at low cost and with no time investment and little knowledge investment (relative to implementing an active trading strategy yourself)

"Active trading" is the second huge negative in investing. It is not a benefit. Active trading coupled with divsersification is the best way to ensure mediocre to poor results.

"All intelligent investing is value investing - to acquire more than you are paying for. Investing is where you find a few great companies and then sit on your ass. - Charlie Munger at Berkshire Hathaway's 2000 Shareholder Meeting

"Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell."
- Warren Buffett

"Charlie and I decided long ago that in an investment lifetime it's too hard to make hundreds of smart decisions. Therefore, we adopted a strategy that required our being smart - and not too smart at that - only a very few times. Indeed, we'll now settle for one good idea a year. (Charlie says it's my turn.)" - Warren Buffett

With regards to "little knowledge investment", if you plan to "invest" (and I use the term loosely) with "little knowledge" then your expectations should be the same as your knowledge level, that is, that your returns will be similar to a GIC (with a higher risk profile to compensate for your lack of knowledge).



- A way for investors with small portfolios to work with a licensed advisor


If by "licensed advisor" you mean sales person, then you are correct. However I don't see how this is an advantage.

When I started with $3000 10 years ago, and even now with over $1.2M I still don't want to work with a licensed advisor. The game is already tough enough without somebody else manouvering me into higher frictional costs. I performed far better with $3000 than any licensed advisor could have done for me in the last 10 years.


However, for some people, retail MFs are going to be their choice, because they are the most available and the most accessible (it is actually very difficult to find an advisor to implement an ETF portfolio for accounts of less than $250K).

It is not in the advisor's best interest to recommend the lowest cost option or work with individuals with smaller amounts of capital (e.g. $3000).


For those people, who either can't or won't DIY, mutual funds provide a way to get exposure to the market. Yes, at high cost, and yes, I think costs matter (I think they are the number one factor in determining long-term investment success, actually). But even I sometimes buy milk at the convenience store. ;)

We would need to agree to disagree. Half my investment income is not worth the 'benefit' of using an advisor/sales person to "get into the market". You don't need to be a DIY investor to buy a low-fee index fund - you just need to be aware that they exist.

Capital + lack of financial knowledge + financial advisor = fee gravytrain for decades to come.

Having said that, I don't blame financial planners for doing what they do. I have friends who are financial planners and they do very well for themselves. If someone wanted to recommend a profession for their children, I strongly recommend financial planning. Living off the fees from your customers is a very nice way to go, especially when you will have these customers for decades; it's like having the income of a surgeon without the liability.

[Rickson9]

I guess it should be mentioned as well, that there are some managed mutual funds that charge more reasonable MERs. Phillips Hager North (although now they have higher MER versions for financial planners) and Mawer come to mind.

The trouble is, commission based financial planners will never recommend low MER mutual funds because they get their income from trailer fees (a percentage of the MERS). This, in my mind, causes a huge conflict of interest because it is the high MER mutual funds that supply the best income to the financial planner.

Good points!

[MoneyGal]

Rickson: I don't think we need to agree to disagree! I think we already agree.

I apologize for not getting the full context of your post about GICs vs. mutual funds - my brain didn't fully process the "in terms of long-term results" portion of what you were saying.

The reason we don't need to agree to disagree is that I personally don't value any of the selling points that I myself laid out in favour of mutual funds. I should have said I was essentially playing devil's advocate.

The problem is that there are people who cannot or will not DIY (or even really pay attention to their investments). For those people, mutual funds are better than the alternatives they would consider, and provide a way to have another person actually doing the transaction for them.

Is this the way I personally invest? Not on your life. :)

[Rickson9]

The problem is that there are people who cannot or will not DIY (or even really pay attention to their investments). For those people, mutual funds are better than the alternatives they would consider, and provide a way to have another person actually doing the transaction for them.

Agreed. This describes everybody including the original poster and is the reason I highly recommend financial planning to anybody looking for a lucrative career.

[The_Number]

I agree with others that the expense ratios for mutual funds in Canada are really expensive. *However*, I'm not willing to say mutual funds are bad for most people for reasons MoneyGal has already enumerated.

To Rickson: Diversification issue is whether or not you believe in Modern Portfolio Theory (You need to admit that it is at least a viable theory.)

On a separate note, I found it a bit frustrating that the complete mutual fund information (statistics) is not freely available in Canada. I wanted to spend some time looking through some mutual funds (both index and actively managed) in Canada, but you have to spend $150 or something to subscribe to the Morningstar Adviser service to get statistics like alpha, beta, and Sharpe ratio (I haven't opened my wallet yet -- am I being penny wise and pound foolish?). The same information for American funds are freely available from sites like http://www.mfea.com.

P.S. to Spidey: Your nick is clever. I'm guessing you are an ETF man? ;)

[Rickson9]

To Rickson: Diversification issue is whether or not you believe in Modern Portfolio Theory (You need to admit that it is at least a viable theory.)

I'm not sure what I am admitting to?

Diversification/MPT is viable to ensure mediocre performance. I'll buy that.

95+% of individuals are uncomfortable with portfolio concentration. A similar number believe in diversification. This is one of the major reasons why the majority will not be wealthy. This is not meant to be a slam on the average person; it just is the way it is.

Actually, being wealthy is not really important to most people, which is fine; there are more important things in life than hoarding assets that will never be used.

[The_Number]

As I understand it, the basic argument of MPT is that you can decrease the linear risk/return ratio by diversifying. For example, MPT would argue that a portfolio that consists of 80% stocks + 20% bonds has less potential returns than a portfolio of 100% stocks, *but* the mitigated risk by diversification (in this case asset allocation) is greater relative to the return you give up ("You are reducing a lot of risk, but you don't have to give up that much return). On the other end, 20% stocks + 80% bonds have greater potential return *and* lesser risk compared to 100% bonds.

When I say that the theory is viable, I mean:
(1) it is justifiable by a "real" economic theory
(2) it has empirical data to support the theory
(3) the mathematical formula (which I do not purport to understand :p) is coherent
(4) enough credible economists believe in it

Wouldn't you agree (regardless of whether you personally think it's true or not or not its application is suitable/beneficial to you or most people)?

[Rickson9]

As I understand it, the basic argument of MPT is that you can decrease the linear risk/return ratio by diversifying. For example, MPT would argue that a portfolio that consists of 80% stocks + 20% bonds has less potential returns than a portfolio of 100% stocks, *but* the mitigated risk by diversification (in this case asset allocation) is greater relative to the return you give up ("You are reducing a lot of risk, but you don't have to give up that much return). On the other end, 20% stocks + 80% bonds have greater potential return *and* lesser risk compared to 100% bonds.

Buying more doesn't decrease risk. I don't see how that makes sense.

MPT's basic premise is that the market has priced in all information. Which is wrong. The basic premise should be that that in the _majority_ of cases, the market has priced in _most_ of the information.

"The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it." - Warren Buffett, 1993 Chairman's Letter to Shareholders



When I say that the theory is viable, I mean:
(1) it is justifiable by a "real" economic theory
(2) it has empirical data to support the theory
(3) the mathematical formula (which I do not purport to understand :p) is coherent
(4) enough credible economists believe in it

Wouldn't you agree (regardless of whether you personally think it's true or not or not its application is suitable/beneficial to you or most people)?

(1) Not sure what "real" economic theory means? Value investing is a "real" economic theory as well?
(2) Value investing has empirical data to support the theory as well?
(3) The formulas behind value investing on the one hand and credit default swaps on the other is coherent as well?
(4) A lot of credible cartographers believed in the flat earth theory a couple hundred of years ago?

http://blogs.wsj.com/marketbeat/2009/05/02/buffett-and-munger-stay-away-from-complex-math-theories/

Math is used to justify many things. Numbers seem to have a way of convincing people - I should know, as an engineer working in the drug industry we use company-sponsored peer-reviewed, multi-center, randomized, double-blinded, cross-over studies powered for non-inferiority, to convince our customers to buy our pharmaceutical products. Math (especially statistics), in any industry, is the absolute best way to sell an idea.

Similar to how institutions use mathematics to sell the idea of MPT.

I agree that without MPT I would not be able to beat the market. The only reason value investors hold an advantage over the majority is that the majority subscribe to MPT and the tiny minority subscribe to value investing.

It is fortunate that value investing cannot be taught because 99 out of 100 people do not believe in it - which is good for the 1.

"While it might seem that anyone can be a value investor, the essential characteristics of this type of investor...may well be genetically determined. When you first learn of the value approach, it either resonates with you or it doesn't."
- Seth Klarman

"It is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately with people or it doesn't take at all. It's like an inoculation. If it doesn't grab a person right away, I find you can talk to him for years and show him records, and it doesn't make any difference."
- Warren Buffett

I didn't undertand this quote by Warren Buffett when I first read it in my teens. I didn't understand why people didn't want to be wealthy. I do now.

MPT can be taught. MPT is widely subscribed to. Value investing cannot be taught. Value investors are why the wealthy are in the minority.

[FinancialJungle]

Buffett does run a concentrated portfolio, but not as concentrated as one might think. Many of his top holdings are global blue chip companies diversified across many sectors including food & beverage, industrial, personal & household goods, banks, credit cards, pharmaceuticals & biotech, insurance, and oil & gas.

Procter & Gamble alone is probably as diversified as 100 small caps combined.

[Rickson9]

Buffett does run a concentrated portfolio, but not as concentrated as one might think. Many of his top holdings are global blue chip companies diversified across many sectors including food & beverage, industrial, personal & household goods, banks, credit cards, pharmaceuticals & biotech, insurance, and oil & gas.

Procter & Gamble alone is probably as diversified as 100 small caps combined.

It is somewhat difficult to run a "concentrated" portfolio when one has amassed tens of billions of dollars. Especially considering that the tens of billions of dollars didn't appear all at once.

[ernestmanning922]

Nice topic and found some excellent post here!

Mutual funds offer great diversification opportunities, but you should know what you are getting into.

[lb71]

Mutual funds are good investment choice for smaller investors. If you are starting out you can invest in mutual funds for as little as $25 or $50 a month. You won't be able to do that with stocks without incurring high fees. Some, like the TD e-series, provide low MERs. Once you build up a decent size asset base, you can branch out and invest individually. Mutual funds have their weaknesses, but they also have a place.

[FinancialJungle]

It is somewhat difficult to run a "concentrated" portfolio when one has amassed tens of billions of dollars. Especially considering that the tens of billions of dollars didn't appear all at once.

Birkshire's 1979 portfolio looks reasonably diversified across many sectors. Also we should take into consideration the businesses that were eventually bought outright by Birkshire. (Example, GEIGO.) The aggregate of all the public and private investments is even more diversified.

No. of Sh. Company Cost Market
---------- ------- ---------- ----------
(000s omitted)
289,700 Affiliated Publications, Inc. ........... $ 2,821 $ 8,800
112,545 Amerada Hess ............................ 2,861 5,487
246,450 American Broadcasting Companies, Inc. ... 6,082 9,673
5,730,114 GEICO Corp. (Common Stock) .............. 28,288 68,045
328,700 General Foods, Inc. ..................... 11,437 11,053
1,007,500 Handy & Harman .......................... 21,825 38,537
711,180 Interpublic Group of Companies, Inc. .... 4,531 23,736
1,211,834 Kaiser Aluminum & Chemical Corp. ........ 20,629 23,328
282,500 Media General, Inc. ..................... 4,545 7,345
391,400 Ogilvy & Mather International ........... 3,709 7,828
953,750 SAFECO Corporation ...................... 23,867 35,527
1,868,000 The Washington Post Company ............. 10,628 39,241
771,900 F. W. Woolworth Company ................. 15,515 19,394
---------- ----------
Total ................................... $156,738 $297,994
All Other Holdings ...................... 28,675 38,686
---------- ----------
Total Equities .......................... $185,413 $336,680
========== ==========

[George]

Thank you to the both of you for your opinions. I must admit that since Oct. I have become an extremely interested watcher of BNN.


I strongly recommend that you stop this. It won't make you better informed, nor will it assist in your investment decisions. If anything, it'll turn your attention toward short-term market shifts and make you oscillate from euphoria to depression on a weekly basis. Turn the TV off and stop watching what the markets are doing on a daily basis. You'll be happier and wealthier.



Now it is 30 years later and the times today are not just a normal bubble correction but a paradigm shift in the financial industry.


I think you should look long and hard at the above sentence, and decide whether it is you that's talking, or your television. I think it's your television.



I want to know how the mutual fund industry will be able to justify themselves to those like me who are looking at different ways to self manage their finances.

Not all mutual funds are created equal. ETFs and index funds are still "mutual funds" in the broad sense of the term, but they don't have high fees.

In any event, you should never invest your money in something you don't understand. Either take the time to learn about your options, or stick the money in something that you do understand.

[Rickson9]

Birkshire's 1979 portfolio looks reasonably diversified across many sectors. Also we should take into consideration the businesses that were eventually bought outright by Birkshire. (Example, GEIGO.) The aggregate of all the public and private investments is even more diversified.

It is interesting that you think that 13 stocks across a third of a billion dollars (and over 50% of the market value in 4 stocks) is diversified. Mutual funds often hold hundreds of stocks and individuals often invest in a few mutual funds. I wouldn't be surprised if the average Canadian holds 1300 stocks with only a few thousand dollars at stake.

We currently hold 6-7 stocks; if we were so fortunate enough to continue to amass capital (we don't have the benefit of entirely owned businesses that continue to churn out profit capital that needs to be allocated), I think we would probably end up holding 13 stocks by the time we reached a few hundred million dollars.

Those who don't understand value investing and portfolio concentration will often take somebody with hundreds of millions of dollars (or billions) and point to how much they own and how seemingly diversified their holdings are. The end does not describe the process. Assets are bought with capital and then held for a long period of time (or never sold). As capital grows and you keep adding pillars to your castle, it looks like you decided to build a castle with a hundred pillars. Then you get a beginner who wants to build a shack and builds it with a hundred pillars and wonders why it isn't working so well.

In any case, we should be glad that diversification can't produce significant wealth - otherwise it would be easy to become wealthy and everybody would be able to do it (although having said that, value investing and portfolio concentration helped us become millionaires from 40k in student loans 10 years ago; and it really wasn't that hard. But again, it's not the difficulty that stops people but the fact that nobody believes in it)

Value investing and portfolio concentration can't be taught; 99% of individuals will take the MPT shotgun and diversify themselves into mediocrity. Every value investing book states as much.

Wealthy individuals can espouse value investing and portfolio concentration until the cows come home but 99% of people won't buy it (which is true even on this finance-centric forum let alone the general public); which is fine by me - if they don't want to take the money, I will.

I actually had lunch with a fairly wealthy individual today (range of double digit millions) and he made an interesting point, "People don't understand the concept of buy quality, buy cheap and never sell. They either can't figure out what quality is, what cheap is, and they don't have the patience to never sell. They screw themselves."

PS: This is another reason why generational wealth is seldom generational - eventually heirs of a fortune will break away from their value roots to do other things. The mistakes are often covered up by large sums of capital, but over time, even large sums of capital are dwindled away. You can't teach value investing so eventually a family member will diversify their way into MPT and that will be the beginning of the end of the family fortune.

PPS: But I digress horribly.

[Rickson9]

I strongly recommend that you stop this. It won't make you better informed, nor will it assist in your investment decisions. If anything, it'll turn your attention toward short-term market shifts and make you oscillate from euphoria to depression on a weekly basis. Turn the TV off and stop watching what the markets are doing on a daily basis. You'll be happier and wealthier.

I think you should look long and hard at the above sentence, and decide whether it is you that's talking, or your television. I think it's your television.

Not all mutual funds are created equal. ETFs and index funds are still "mutual funds" in the broad sense of the term, but they don't have high fees.

In any event, you should never invest your money in something you don't understand. Either take the time to learn about your options, or stick the money in something that you do understand.

I agree.

[Retired at 31]

I strongly recommend that you stop this. It won't make you better informed, nor will it assist in your investment decisions. If anything, it'll turn your attention toward short-term market shifts and make you oscillate from euphoria to depression on a weekly basis. Turn the TV off and stop watching what the markets are doing on a daily basis. You'll be happier and wealthier.

I'm an avid watcher of bnn too - but only when Amanda is on :D

[Rickson9]

I'm an avid watcher of bnn too - but only when Amanda is on :D

Great...now I need to watch bnn to check out this Amanda person ;)

[spirit]

I think that in the last year I panicked slightly.:oConsidering retiring from a job I loved for many years, arguing with my boss, handing in my resignation, deciding to come back and then dealing with the loss of a great deal of my retirement portfolio. I was lucky to get my job back, will be there next year and the portfolio has recovered a little more since the fall. Basically I have some breathing room to step back and look over some of our investment decisions. (My mutual fund advisor told me to quit watching BNN but I think you guys are a little more objective:)) Thank you to all who took the time to advise me.

[OntFA]

Great...now I need to watch bnn to check out this Amanda person ;)

Yes, Amanda Lang is reason enough for many men to watch BNN. And she actually seems to know her stuff.

As for the topic of this thread, it's not that mutual funds are poor investments but rather which ones people choose, how they put them together in a portfolio, and then how they behave once they're invested.

[FinancialJungle]

Man, that was an earful. I was hoping to muddle though this thread with just a few sentences. :( I should've mentioned sooner that I subscribe to value investing but not portfolio concentration.


It is interesting that you think that 13 stocks across a third of a billion dollars (and over 50% of the market value in 4 stocks) is diversified.

As I alluded to earlier, Berkshire's portfolio encompasses beyond just the publicly equities, but also wholly-owned subsidiaries, bonds, preferreds and derivatives. For instance in 1995, Berkshire held $2.4B worth of GEICO in their investment account. The following year, they acquired the remaining 49% of the company, and GEICO immediately vanished from Berkshire's investment portfolio. The point is there are a lot of hidden values and their aggregated portfolio is far more diversified that what most people are lead to believe.

Another point. The number of stocks alone doesn't determine the diversity of a portfolio. A portfolio with one conglomerate (like Berkshire Hathaway) is arguably more diversified than a portfolio of 20 energy trusts. We need context.

In the case of Berkshire, although their portfolio has fewer stocks and is more concentrated than the S&P 500, it is still reasonably diversified across food & beverage, industrial, personal & household goods, banks, credit cards, pharmaceuticals & biotech, insurance, and oil & gas.

Yes, it's concentrated, but concentration is a matter of degree.

I noticed in your portfolio, K-Swiss, Fossil, Columbia Sportswear, and The Buckle represent over 70% of portfolio value. Of that, K-Swiss and Fossil command over half. More importantly, all these are one-trick consumer discretionary ponies. I just don't see Buffett advocating this level of concentration.

Just one man's opinion.

[venter]

I'd like offer a rebuttal to Rickson9. As a CFP I think I know a little about FA's. Most of us do a hell of a lot more than just sell the most expensive mutual funds we can find and sit back and count our money. I know I try to find the best combination of financial products that works for my clients requirements, regardless of the compensation I receive. Many of the funds I use have MERs of less than 2. FYI, funds with MERs of near 3 do not necessarily have a higher commission than one that has an MER of 1.5, if you use a 0% FE load, the trailers are quite often the same.

In addition to portfolio building, I help my clients with tax preparation, provide help with life/disability/CI/LTC insurance and estate planning, give advice on budgeting, mortgage renewal and answer any other financial questions they might have. These are not 10%ers, they need help and I provide it. I even get quotes from reputable firms for some of my client who are single ladies that have been victims of unscrupulous contractors in the past. Oh, BTW, other than tax preparation (for which I charge only nominal fees) I do not receive compensation for these services.

[Rickson9]

I noticed in your portfolio, K-Swiss, Fossil, Columbia Sportswear, and The Buckle represent over 70% of portfolio value. Of that, K-Swiss and Fossil command over half. More importantly, all these are one-trick consumer discretionary ponies. I just don't see Buffett advocating this level of concentration.

Just one man's opinion.

We've had a great ride on those ponies. Hopefully we'll be able to continue that ride. I like the one-trick comment - it brings back memories of comments a decade ago...

Actually Buffett and Munger have suggested during a few shareholder meetings that an individual would do quite well with 1 stock. We're a bit more diversified.

Again, most people see a castle with 100 pillars built over decades and assume that that is the best way to start.

In the end we are thankful that the majority don't believe in value investing/portfolio concentration - investing is very difficult as it is.

[Rickson9]

I'd like offer a rebuttal to Rickson9. As a CFP I think I know a little about FA's. Most of us do a hell of a lot more than just sell the most expensive mutual funds we can find and sit back and count our money. I know I try to find the best combination of financial products that works for my clients requirements, regardless of the compensation I receive. Many of the funds I use have MERs of less than 2. FYI, funds with MERs of near 3 do not necessarily have a higher commission than one that has an MER of 1.5, if you use a 0% FE load, the trailers are quite often the same.

I neglected to mention FE and BE loads.

I don't think I've met a CFP who sold any significant quantity of no-load, low-fee index funds. Probably because they wouldn't be able to afford an office.


In addition to portfolio building, I help my clients with tax preparation, provide help with life/disability/CI/LTC insurance...

I forgot about whole/universal life insurance. Another cash cow.


...and estate planning, give advice on budgeting, mortgage renewal and answer any other financial questions they might have. These are not 10%ers, they need help and I provide it. I even get quotes from reputable firms for some of my client who are single ladies that have been victims of unscrupulous contractors in the past. Oh, BTW, other than tax preparation (for which I charge only nominal fees) I do not receive compensation for these services.

I understand this. I work in sales. We offer lots of services for nominal or no fee to get access to a sale of a more profitable item (e.g. universal life insurance and high fee mutual funds). Sell the gasoline to get the sale cigarettes as it were.

Our accountant/financial planner is always trying to manage our portfolio for us after every tax season. We just stick with the tax prep. The tax prep is a great value-add; for a nominal fee the CFP gets access to sell their products (labour sponsored funds anyone? flow-through shares?).

Again, I have friends who are financial planners and they do very well for themselves. If someone wanted to recommend a profession for their children, I strongly recommend financial planning. Living off the fees from your customers is a very nice way to go, especially when you will have these customers for decades.

Sales is a very good profession.

[MoneyGal]

Rickson, advisors (even CFPs) who sell only no-load and index funds/ETFs exist. (I was one of them, and I worked in two separate offices where this was the only way we invested clients' funds, and all of the trading staff had CFPs as a minimum, with CFAs in there too.)

Some are advisors who built their business using retail mutual funds and then switched over, and others built no-load, passive practices from the get-go. The only proviso is that you need high account minimums to make this work, and you need to be a fee-only advisor, obviously, because you aren't being compensated by way of commissions.

[The_Number]

Man! This thread is moving fast...

My response to Rickson (Post #16): I am not arguing against fundamental analysis (I said nothing about whether fundamental analysis is correct or even viable.) Furthermore, I don't think FA and MPT are in the same categories of things to be comparable (FA and the so-called "Random Walk" would be in the same category), and they are certainly not mutually exclusive (There are plenty of funds that diversify among what managers consider to have strong fundamentals.) Finally, I disagree that only 1% of investors are fundamentalists. Although my observation is rather informal, fundamentalists are the majority among practicing investors.

But let me put the whole thing back in the context of the OP's query. Based on what the OP said in the first post (limited knowledge/experience/time commitment), I don't think a concentrated portfolio of stocks is appropriate. Although I am eminently not qualify to give advice by certified knowledge (like Moneygal and ventor) or personal experience (Rickson), I'd suggest a low-cost index fund or an ETF. I felt Rickson's dismissal of all mutual funds to be a bit unfair.

P.S. And like MoneyGal said, I think the OP would benefit from hiring a fee-only adviser to sit down and talk about specific investment options.

[venter]

Give up moneygal, rickson obviously knows every financial planner on the planet is a greedy, slimy salesperson looking to bilk unsuspecting clients of their hard earned money. I'm surprised he has "friends" in the business, how can he possible associate himself with people like this, how will he ever get the stink off his pure, righteous body :rolleyes:

[Rickson9]

P.S. And like MoneyGal said, I think the OP would benefit from hiring a fee-only adviser to sit down and talk about specific investment options.


Some are advisors who built their business using retail mutual funds and then switched over, and others built no-load, passive practices from the get-go. The only proviso is that you need high account minimums to make this work, and you need to be a fee-only advisor, obviously, because you aren't being compensated by way of commissions.

I agree. Fee-only advisors are the only way to go if you are set on using a financial planner. Hopefully that person will have the minimum or they might find themselves with not-so-nice options...

[Rickson9]

I'm surprised he has "friends" in the business, how can he possible associate himself with people like this, how will he ever get the stink off his pure, righteous body :rolleyes:

It shouldn't be surprising. My friends are straight forward with how they make their money. We're all sales people. Don't pretend that you're doing holy work by offering to do low-cost tax prep or offer life/disability insurance.:rolleyes:

[Rickson9]

My response to Rickson (Post #16): I am not arguing against fundamental analysis (I said nothing about whether fundamental analysis is correct or even viable.) Furthermore, I don't think FA and MPT are in the same categories of things to be comparable (FA and the so-called "Random Walk" would be in the same category), and they are certainly not mutually exclusive (There are plenty of funds that diversify among what managers consider to have strong fundamentals.) Finally, I disagree that only 1% of investors are fundamentalists. Although my observation is rather informal, fundamentalists are the majority among practicing investors.

A lot of people are fundamentalists but only a tiny percentage of people believe in value investing and portfolio concentration. These are different things. If fundamental analysis led to wealth, accountants would all be rich.

[venter]

Rickman, I never said I was doing "holy" work, only offering services that my clients require and providing advice when asked. You are questioning my intentions in doing so and seem to think the sole purpose for my "help" is to find more ways to "sell" stuff. I guess I'm a bad salesman, I'm still in the first income tax bracket. I chose this field after spending 10 years as a DIYer thinking I could help people who were getting bad advice or none at all. These are people that are not interested in being DIYers. I know most of us cannot understand this, it just "is".

I guess my point is you cannot paint all advisors with the same brush or possibly know what our motivations and intentions are. That's just as bad as saying all Muslims are terrorists or all Catholic priests are child molesters based on your experience or perception (no offense is intended to Muslims or priests, just pointing out the absurdity of generalizations).

[CanadianCapitalist]

These are people that are not interested in being DIYers. I know most of us cannot understand this, it just "is".


I can understand this. I'm not sure what the percentage it but a significant portion has no interest in DIY investing for whatever reason.

If a person has no interest in DIY, the alternative is hiring someone competent and honest to do it. And naturally, they should be willing to compensate the advisor adequately for their time and expertise.

[MoneyGal]

Wading in here with a distinction I think is important (but I'm not sure I will get a lot of agreement):

- a fee-only advisor manages money, but charges fees directly to the client to do so.

- a fee-for-service financial planner charges a fee for financial planning (asset allocation, tax planning, estate planning, retirement planning, etc.) - not for portfolio management.

The two activities of financial planning and portfolio management are distinct and you are unlikely to find any advisor offering both for the same fee.

At the last brokerage office I worked in, we were fee-only advisors (charging clients a tiered fee for investment management) who also provided an optional fee-for-service financial planning add-on (we had a very specialized clientele where there was a need and appetite for services beyond portfolio management).

Where am I going with this? I see the recommendation to use a "fee-only" advisor frequently, even by people saying they are DIYers.

If you manage your own money, or you don't meet portfolio minimums, you can still use a fee-for-service advisor to provide you with advice on various topics (but NOT trade in securities). This is NOT the business model of most financial advisors, so I think this advice can be very confusing. A DIYer cannot use a "fee-only" advisor to get portfolio advice unless she moves her money to the advisor.

Make sense?

[venter]

Moneygal, I offer to do a complete financial plan or partial plan (investment only etc) for a fee. I explain that if the client wants to do the investment or insurance through me, I will waive the fee for the plan. I explain how I am compensated for this so they understand what they pay in "hidden" costs. I have never had someone say they would rather pay an upfront planning fee. They understand I will be compensated and want me to handle putting the plan into place because they don't want to do it themselves. Many are tired of the way they have been treated by the bank or some large investment firm in the past and don't want to go open a discount brokerage account and find another insurance agent etc. That's been my experience over the 3 years I've been in the business anyway.

[MoneyGal]

V: Yep, yours is the business model you see most often.

I was commenting on Rickson's comment about fee-only being the way to go if you don't want to DIY, and adding "hopefully you meet the minimums."

You can get financial advice without moving your assets to an advisor. But this business model is rare.

[Rickson9]

Wading in here with a distinction I think is important (but I'm not sure I will get a lot of agreement):

- a fee-only advisor manages money, but charges fees directly to the client to do so.

- a fee-for-service financial planner charges a fee for financial planning (asset allocation, tax planning, estate planning, retirement planning, etc.) - not for portfolio management.

The two activities of financial planning and portfolio management are distinct and you are unlikely to find any advisor offering both for the same fee.

At the last brokerage office I worked in, we were fee-only advisors (charging clients a tiered fee for investment management) who also provided an optional fee-for-service financial planning add-on (we had a very specialized clientele where there was a need and appetite for services beyond portfolio management).

Where am I going with this? I see the recommendation to use a "fee-only" advisor frequently, even by people saying they are DIYers.

If you manage your own money, or you don't meet portfolio minimums, you can still use a fee-for-service advisor to provide you with advice on various topics (but NOT trade in securities). This is NOT the business model of most financial advisors, so I think this advice can be very confusing. A DIYer cannot use a "fee-only" advisor to get portfolio advice unless she moves her money to the advisor.

Make sense?

Got it. Thanks for the clarification!

An individual that needs fee-only services is likely not a true DIYer.

In broad general terms I believe that the best benefit to the majority of individuals is fee-for-service. Portfolio management is a blind spot for most individuals where they get raked over the coals.

Regardless of how much individuals rant about 'hidden' fees, most individuals prefer not to see a fee. Probably because they feel that if they don't 'see' it that it isn't happening. Who knows. In any case, my feeling is that if you don't want to see it, then you deserve what you get.

[Rickson9]

You are questioning my intentions in doing so and seem to think the sole purpose for my "help" is to find more ways to "sell" stuff. I guess I'm a bad salesman, I'm still in the first income tax bracket.

I don't question your intention. Sales is an honorable profession. I'm in sales. My wife is in sales. I understand that sales has many auxiliary personal rewards aside from the final sale.


These are people that are not interested in being DIYers. I know most of us cannot understand this, it just "is".

I understand this. The vast majority are not DIYers. I also understand that this is the way it is and the way it will be.


I guess my point is you cannot paint all advisors with the same brush or possibly know what our motivations and intentions are. That's just as bad as saying all Muslims are terrorists or all Catholic priests are child molesters based on your experience or perception (no offense is intended to Muslims or priests, just pointing out the absurdity of generalizations).

What I am saying is that the financial advice that would fully benefit the individual and not the advisor is a business model that is rare because the advisor would not get paid very well. So perhaps I cannot paint all advisors with the same brush, but my brush would be good enough to characterize a large portion of the advisor population; (for better or worse) including yourself. As MoneyGal pointed out, "yours is the business model seen most often."

Again, your profession is a very good one. Sales is one of the best professions out there. I am not joking or being patronizing when I say that I would strongly recommend this profession to anybody.

In any case, when all is said and done I can only speak for myself and for myself a financial advisor offers no benefit.

[FinancialJungle]

Actually Buffett and Munger have suggested during a few shareholder meetings that an individual would do quite well with 1 stock. We're a bit more diversified.

Presumably that 1 stock is Berkshire Hathdaway. (I heard that from an interview.) Unfortunately adding more apparel stocks to your portfolio would only dilute the diversification effect of BRK.

Rickson, just so you know, I added Fossil and Buckle to my watch list. Not that I'm planning to bet my farm, but these stocks do have merits.

I'm just curious regarding your portfolio concentration; what if you're wrong? You may not agree, but there's a pretty good chance that K-Swiss will turn out to be a long-term flop. Both sales and cash balance are dwindling. The stock is deteriorating along with fundamentals. It's been losing sales even before the recession, so an economic recovery might not be the catalyst to revive the company.

This is your largest holding, so presumably this is your best idea. Despite your meticulous analysis, there are external variables that are beyond your nor the management's control. Some of the inputs won't be known until years later. Do you have a plan B in case you make a series of blunders?

[FinancialJungle]

Diversification/MPT is viable to ensure mediocre performance.

Diversification helps sidestep company-specific risks. Diversification keeps your portfolio reasonably close to expected return. Concentration increases potential rewards (and losses) but it does not improve expected return.

Different people define diversification differently. In my opinion, one can diversify with as little as 20 but it really depends on the stock. For example, holding Power Financial is as diversified as holding both Great West and IGM together.

Personally, I feel going from 7 stocks to 20 or 30 helps keep a cap on downside risks without giving up expected return. Some people probably ranks a series of stocks based on some strict criteria, but in the end, actual returns will not resemble anything close to the original ranking.

[Rickson9]

Diversification helps sidestep company-specific risks. Diversification keeps your portfolio reasonably close to expected return. Concentration increases potential rewards (and losses) but it does not improve expected return.

For us, we have not found concentration to increase potential losses (yet). In addition, we have found that it actually has improved expected returns.

We may have been lucky (so far). Hopefully we will be as lucky in the decades to come.

[FinancialJungle]

For us, we have not found concentration to increase potential losses (yet). In addition, we have found that it actually has improved expected returns.

We may have been lucky (so far). Hopefully we will be as lucky in the decades to come.

Rickson, I have no doubt you have the discipline to beat S&P 500 over the long-haul, but I wasn't comparing a 7-stock portfolio vs the index; I was comparing a 7-stock portfolio vs a ~25-stock portfolio, both following the same value discipline.

As I alluded above, years from now, the actual returns won't look remotely close to what you've envisioned. The real returns will be determined by a myraid of variables, many of which won't be known for years to come.

How can anyone confidently produce a condensed a list 7 stocks and claim these are the best 7 ideas without the foresight of all the variables to come? A series of slight changes in wind direction can fritter away all your analyses.

There's a whopping 500 stocks in S&P 500. Without the benefit of hindsight, the 7th best idea is practically as good as the 30th best idea. I'd much rather give up, say, 10 basis points of expected return to spread my eggs across many equally secured baskets.

Besides, expected return isn't everything. Let me throw in a hypothetical example. Suppose you sweated 20 years to save $10 million. Someone comes along and offers to double your net worth if you roll a 1, 2, 3, 4, or 5. The catch is if you roll a 6, you lose everything. Would you roll the dice? I wouldn't. Because the first $10 million has greater utility than the second $10 million.

If I can achieve my goals with 30 stocks, why would I risk it all just for a marginally better expected return? It's the same reason why Susan Orman's $25 million portfolio only has $1 million in stocks and rest in bonds. We can only consume so much in life.

On a different note, I've been meaning to ask you. Have you considered Reitmans over Buckle? Both have similar growth profiles, and Reitmans is virtually debt-free. The advantage is that Reitmans pays tax-efficient Canadian dividends.

[Rickson9]

Rickson, I have no doubt you have the discipline to beat S&P 500 over the long-haul, but I wasn't comparing a 7-stock portfolio vs the index; I was comparing a 7-stock portfolio vs a ~25-stock portfolio, both following the same value discipline.

Fair enough.


There's a whopping 500 stocks in S&P 500. Without the benefit of hindsight, the 7th best idea is practically as good as the 30th best idea. I'd much rather give up, say, 10 basis points of expected return to spread my eggs across many equally secured baskets.

The 7 ideas didn't all appear at once so I'm not sure that it is as simple to compare the 7 best ideas vs the 30 best ideas.

The reality is that I (thought I) had one good idea in one year and I took it. Then in the next year, since the price rose, that idea wasn't a good idea in the second year.

However, I still wanted to do something because over time cash piles up so I wanted to look for another idea. After 10 years I had 6-7 ideas.

In some years a previous idea became the best idea (resulting in an increase my stake in a company), in other years a new idea was introduced (which increased diversification), and in other years still I had no ideas (in these years, I compared the best idea to what I held and if I couldn't justify adding it, it meant that I should add to something I already owned or do nothing at all).

Every time I was faced with adding a new stock to the portfolio, I had to think long and hard about it. I don't like diversification at all. I am abnormally adverse to it. To me, it is like adding a new member to the family; and I already have a pretty good family...

I didn't really go out and decide to spread my money around. It was the best idea during that period of time. If I had 30 ideas I probably would have bought them all, but I rarely have 1 idea in a year let alone 30.


Besides, expected return isn't everything. Let me throw in a hypothetical example. Suppose you sweated 20 years to save $10 million. Someone comes along and offers to double your net worth if you roll a 1, 2, 3, 4, or 5. The catch is if you roll a 6, you lose everything. Would you roll the dice? I wouldn't. Because the first $10 million has greater utility than the second $10 million.

I'm not sure that this is an accurate characterization, but I understand your point.


If I can achieve my goals with 30 stocks, why would I risk it all just for a marginally better expected return? It's the same reason why Susan Orman's $25 million portfolio only has $1 million in stocks and rest in bonds. We can only consume so much in life.

Honestly, what this tells me is that Ms. Orman doesn't feel comfortable buying stocks for investment. Over time, value investors who believe in portfolio concentration with regards to stock, will completely allocate all their capital into securities. It is an OCD.


On a different note, I've been meaning to ask you. Have you considered Reitmans over Buckle? Both have similar growth profiles, and Reitmans is virtually debt-free. The advantage is that Reitmans pays tax-efficient Canadian dividends.

I haven't looked at Reitmans. With regards to Buckle, the reason I am more comfortable with The Buckle is because I have looked at over 10 years of their financial data and I like the fact that the business is family-owned. Actually all the companies in our portfolio are family controlled. In The Buckle's case, the Hirschfeld family owns over 40% of the business.

In addition, I'm not a fan of dividends. Why?

1) If a business is earning double digit returns on equity (in The Buckle's case it is an unsustainable 30%), it is more beneficial to me to have the company keep the cash and compound it. I am not convinced that I could duplicate that kind of return with the dividends paid. In fact I am positive I could not duplicate that return.

I copied that piece of advice from Warren Buffett (I don't copy everything from the man, but sometimes what he says resonates; other times, not so much):
http://valueinvestorindia.blogspot.com/2005/10/warren-buffett-on-dividend-policy.html

2) I don't need the cash flow (I already have more capital than I can allocate). The business can keep the cash, compound it, hopefully pay out no dividends or anything else that I have to pay taxes on, and I'll take the money out later.

[spirit]

It has been exactly one year since I started this thread. I have learned a great deal from this forum and for that I thank all of you. Last year I believed that there was a paradigm shift in investing but I was new to tracking financial markets. I was like a person who goes to the same restaurant and pays well for the service. Today I am ready to tackle cooking some of my own meals.:rolleyes: I have stayed away from bonds and will start converting some of our GIC's and mutual funds into ETF's. We are meeting with advisors from the B of M and National Bank where we have our investments to see which one comes up with a good plan that works for us. Both companies have started to offer ETF's and I would like to see what they have to offer. Thanks to you I have a much clearer picture of what pitfalls to look for in their advice to us. But best of all the panicky state I was in last year has changed to one of informed uncertainty:D So one last question... are we in a bull or bear market:p

[Soils4Peace]

Regarding financial planners, I have not met one who matched my choices for mutual funds. I have not found them useful - the ones who earn their keep from sales and trailer fees.

Regarding mutual funds - I did a major house cleaning early this year. I sold all my mutual funds except three. I kept Mac Cundill Value Series C, Trimark Fund SC and Trimark Canadian. Cundill is 5 star, strong even on ten years, and has been great all along, helped somewhat by its currency hedging. The Trimarks have only 1.6% MER. They all outperform their indices at the moment, and are doing well this year.

And I hold TD e-series mutual funds to soak up loose change.

[humble_pie]

from panic to "informed uncertainty" in one year is a perfect evolution i think. And speedy, too.

speaking of the new bmo etfs, they are not yet being forthright enough about their MERs. What they are announcing, on website for example, are the management fees only. But there are other costs in running an etf, eg mailing (often a euphemism for marketing/promotion), custodianship, legal, etc.

bmo etfs' management fee for its toronto titan 60 etf is .15. For this reason, bmo personnel are claiming that this etf is "cheaper" than its older established rival, ishares' top toronto 60 xiu, whose mer is .17. However, once bmo gets around to publishing its full mer and not just its management fee, i would expect that the titan 60 etf will be more expensive than identical ishares xiu.

[spirit]

Thanks for the heads up on ETF's. It is amazing that investing is getting more and more like buying a used car from a dealer:cool:. All those hidden fees:D I will wait for our advisor to go back into the other office and get the plan they have built for us "approved" by their manager.