Passive is not Lazy Investing

As I have said previously I use mostly a passive investment strategy for most of my savings vehicles (RESP, RRSP, TFSA and Spousal RRSP). I was once an Active Investor, but after shooting myself in the feet, then hacking the feet and legs off with a machete, throwing the leg into a great white shark tank and then jumping in after it (OK, I am exaggerating), I decided maybe I wasn’t really cut out to invest in individual stocks. I do hold a few stocks in a few accounts, but they are mostly Dividend Paying stocks, which I simply haven’t had the heart to sell off (they are in  Dividend ReInvestment Plans). Passive investing is not lazy investing (keep that in mind).

I have spoken with a few folks about Passive Investing, and it seems that Passive seems to imply “Fire and Forget” or “Just Leave It and Walk Away” as a methodology. Some folks may make that work, however, as with any investing, there is a need to at least keep up with your investments to see if anything has changed, and to understand what kind of performance you receive from the investment and such (not to mention re-balancing as needed, which is another cornerstone of Passive investing, hence it is not lazy investing ).

This is your money and you should never give your money to any investing concept (or person) and then just assume it will all work out nicely (yes, I am a paranoid former Nortel investor, I plead guilty on that one).

lazy investing

Now that is Lazy! He was also my editor

A good case in point is  Vanguard’s Total Stock Market Index ETF that I own as part of a couple of my accounts, because it boasts being effectively the “… broad U.S. stock market …” in one ETF. It holds many different stocks, but is risky in the sense that it is all in stocks and such, so I decided this might be a good way to have a U.S. Investments portion in my RRSPs. Having said this, I am neither endorsing, nor am I flagging this fund, I am simply using it as an example of why you need to read the annual reports about your investments, if only to stay up to date with where your money is being invested.

By reading the Annual Report, I learned about two terms I was unaware of:

  • R-Squared
  • Beta

Which are both explained in the report’s glossary as ways to measure how closely a fund tracks with a given index. This alone was useful (I like to learn at least 3 things from anything I read, so this was a great start).

The next more important point brought up was that the Fund was going to track a new Benchmark Index, which will be supplied by CRSP at the University of Chicago Booth School of Business. Wait, what the…. Yes, so if you have bought a fund because it tracks one Index, they can change their minds (effectively). Am I worried about this? A little, but any change always worries me.  My guess is it will not change things too much, because most folks who hold this ETF are like me, looking for a “broad spectrum of companies” fund, and if it goes too much away from where they are now, investors will simply sell it and look for something that is closer to what they want. Given the following quote from the above article, I feel OK continuing to hold the fund:

Among the funds that CRSP will now provide indexes for is the $23.5 billion Vanguard Total Stock Market ETF (NYSEArca: VTI)—an index-investing purist’s security that canvasses just about the entire U.S. stock market, and will cover a bit more of it once the transition to the CRSP US Total Market Index takes place.

These three important  things (I learned) alone support my contention that Passive Investing does not mean “Fire and Forget”, you must remain diligent keeping up with your investments and what is happening with them (and at least re-balance once a year too).  If you think you have bought a “balanced” fund, how is it balanced? You need to know these things, and you need to at least read the Annual Reports (not just chuck them in the bin, when they show up in your mail).

Any other examples out there of catching changes in a Fund’s Annual report?

 

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Football, Heat, Drafts and Sunday’s Best as well

Euro 2012 is getting down to it, with an interesting metaphor for the entire Euro Financial meltdown, when Germany smashed Greece (hey, someone had to point that one out). Football as a metaphor for finances? Whodathunkit?

It has been hot here in Ottawa, but may start cooling off in the next few days (we can hope), lots of plants are looking burnt, as is my grass. The Lawn fix it services keep coming by and asking me if I want to buy their services, I have a stock answer, “… does it look like I give a crap about my grass?”, they usually go away quickly after that.

The NHL Hockey draft has come and gone as well, and now we have to ask, “Who screwed up the most?”. The thing with the draft is it is a lot like a financial plan, you can’t tell whether it was any good for a few years (gotta love those sports finance metaphors).

On the Twitter feed we eclipsed 1100 followers, which is cool, but it does keep going up and down (so I guess folks follow for a while, and then unfollow). Sorry if you have left, hope you come back one day, but I did bring back some oldies buy goodies from the archives (they are marked (OBG) if you are curious):

  • With Fathers and Money I reminisced about my Dad (who passed away last year), parents do actually teach their kids a lot about money (even if they don’t realize it).
  • With Computer Virus Scan is it a Scam? I point out that the whole computer virus game is a bit of a mug’s game, but what can you do about it?
  • You know you are really secure when Your Shredder Overheats, but maybe you should do it in smaller loads?
  • Men’s Health brings up the point that if it wasn’t for Viagra a lot of men would NEVER go to the Doctor.
  • What would your answer be if I had a Trillion Dollars (to paraphrase our friends at the Bare Naked Ladies)?

Remember to check out the Twitter feed, and various other Social Media places where I live (including this page on Facebook as well).

You keep seeing the TLA ETF appear and wonder what we are all talking about? That’s OK, I only found out because the N.C.F.B.A. explained it to me (in mono-syllabic (or less) words). Here is a good video from Khan Academy to help you with the concept(s):

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Warnings on Financial Products

After a thoroughly enjoyable discussion with the National Capital Financial Bloggers (and some honored added guests), I feel reinvigorated. The discussions around the table were about many topics and my guess is I will be writing about a few of them over the next few days, but one excellent topic came up from a representative from Horizen ETFs who was visiting with our highly regarded group (why I was included in this group is again a mystery), and the question arose, “Should there be warnings on financial products ?”.

The observation made was that some investment and savings vehicles might need to have better warnings, and in fact Rob Carrick (an honored special guest) pointed out that if you put a strong warning on financial products, some folks might just buy it because of the warning (I believe you would call that the “Cigarette warning syndrome”).

With this in mind, let me give you a possible scenario:

If you were on your standard On Line Broker web site and you started a new BUY transaction, and you selected say BCMETF.XXX (hopefully a fictitious ID for the Big Cajun Man Exchange Traded Fund (the Nitroglycerin and Blasting Caps version of the fund)), and the following warning icon came up on your screen, when you attempted to finalize your transaction:

warnings on financial products

Dangerous Investments Warnings

My question would be, if you saw this kind of warnings on financial products come up on your screen (hopefully with a loud klaxon noise in the background), what would you do?

  1. Would you turn off your computer, and run and hide in your bed with the covers over your head? (which I think is the correct answer)
  2. Get all macho and say, “I can handle it!”, and plow on ahead?  (the wrong answer IMHO)
  3. Go back and read the prospectus on the savings vehicle one more time to be sure?  (an OK way to deal with it, because at least you go in with your eyes open)

Please reply in the comments, I am very curious, since I might try to start a side business publishing financial warning signs.

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Choices: ETF, Mutual Fund, Index Fund, GIC’s, Stocks, Hedge Funds,…

As I mentioned one of the common themes I hear from folks when I attempt to chat with them about how they are saving for their future, is the Tyranny of Choice, and the mental gridlock all of these possible choices can cause for some folks.

I do get lots of questions about, “… what in your opinion is the best vehicle for investing?”, and the easiest answers are:

  • Can you be more specific?
  • It depends on what your goals are, what are your goals?
  • Why does my opinion matter to you?
On this Holy Weekend What is the True Faith of Investing?

hat is the True Faith of Investing?

Note I never answered the question? My advice is usually to go learn some stuff and decide for yourself, since I never feel too comfortable telling people what to do with their money.

As an example, you want to open an RRSP, what do you do? First you find out whether you can put money into an RRSP (do you have RRSP space), then you look into the various RRSP savings vehicles out there. If you are a TD Bank customer, you can set up:

  • A TD Mutual Fund RRSP Account
  • A TD GIC RRSP Account
  • A TD Waterhouse  self-directed RRSP account
  • I am sure a plethora of other things

Notice, what vehicle you can choose ends up being dictated depending on which savings vehicle you try to use (i.e. if you choose a TD Mutual Fund RRSP account, you can buy TD Mutual Funds (and not all of them either)), so the advice here is try to keep as many options open, and set up as flexible an account as possible. In my case I set up a TD Waterhouse Self-Directed RRSP account (but if you bank with BMO you can set up a Nesbitt Burns account, and with other banks you can use their brokerage house, or even some of the on-line brokerage firms).

Self-Directed RRSP accounts are more flexible and more expensive administratively (for the account) (usually), so you need to figure out what makes you comfortable. The other thing with Self-Directed accounts is the SELF-DIRECTED part of it, you are going to make the trades and such in the account. If you don’t feel safe doing this, then maybe you need a full service brokerage house?

As you can see in the past few paragraphs, I haven’t really even touched on the title of this post: which is the better choice ETFs, Mutual Funds, Index Funds, etc., and you know why? It’s nearly the last decision you make you have to set all this stuff up first.

Don’t worry about deciding, worry about getting started on getting the infrastructure in place. You’ll have time to finally decide what you want to buy, but you will need to do a lot of groundwork first.

It took me about 3 weeks to get my Self-Directed RRSP in place and running (so that I could actually make a trade), anybody got it set up and flying sooner?

 

 

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The Locked In Factor

No Not an LIRA

One of the things I have learned about working in the Technology world for over 20 years is that sometimes tunnel vision kicks in for decisions about what technology to use. I found a fascinating article in the Boston Globe by Leon Neyfakh that talks about how the Nuclear Reactor world is now technologically locked-in with a technology that was not the best one for Japan:

Japan’s reactors are “light water” reactors, whose safety depends on an uninterrupted power supply to circulate water quickly around the hot core. A light water system is not the only way to design a nuclear reactor. But because of the way the commercial nuclear power industry developed in its early years, it’s virtually the only type of reactor used in nuclear power plants today. Even though there might be better technologies out there, light water is the one that utility companies know how to build, and that governments have historically been willing to fund.

Economists call this problem “technological lock-in”: The term refers to the process by which one new technology can prevail over another for no good reason other than circumstance and inertia. The best-known example of technological lock-in comes from the 1970s, when VHS and Betamax, two different kinds of videotape, competed in the market until VHS gained a slight lead and then leveraged it to total domination. Whether the VHS format was actually superior to Betamax didn’t matter. After the lock-in, consumers no longer had a choice.

In the financial industry that is how a lot of us end up financially locked in to a specific savings product, like myself with my RESPs in TD Mutual Funds, I ended up financially locked in, because I didn’t really look at other savings vehicles that might have done better.

Feeling financially locked in is an uncomfortable feeling, but if you can change, it isn’t imperative that you jump (the opposite of locked in would be a financial joy rider who simply changes because something seems cool (much like technology junkies need new phones every year)), but you should at least figure out whether you are in the right place financially. All decisions in life should be revisited every once in a while to figure out whether your decision is still valid, and the argument I don’t have time to do that means you have decided your initial decision was valid and you will stick with it (but don’t get to complain about it later).

It is rare that any decision locks you into a single path financially (even with LIRA (Locked in Retirement Accounts) you can change the type of account the LIRA is), so take advantage of the freedom and make sure your decision still works, after all you don’t want to end up with a BetaMax financial solution now do you?

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