blog09mar2008

Hot Off the Web
Jonathan Clements in WSJ’s “The joy of building your portfolio”  discusses his recommended asset allocation in building the U.S. investor’s portfolio. First select a point in the range of 40-80% stocks (typically 60%), the balance in high quality U.S. bonds. He then recommends 25(-30) % foreign content in the stock component. For inflation protection he suggests half the bond content to be inflation protected. After further refinement in each asset class he concludes with the 40% bond portion broken into 14% quality U.S. bonds, 14% TIPS, 4% foreign bonds, 4% emerging market and 4% high yield bonds. Whereas the 60% stock allocation may be composed of 30% total U.S. market, 6% large company value, 6% small company and 3% REITs, then the foreign stock portions rounding things out with 6% broad based foreign, 3% small cap, 3% emerging market and 3% foreign real estate. To top things off, you could include 5% of the grand total in gold or commodities by shaving off a little from the stocks and bonds. You could do a lot worse than by following his advice. (Canadian investors would need to increase the Canadian content. A good start would be by taking his U.S. content recommendations and just splitting them 50:50 into U.S. and Canadian) His suggested implementation is with 14 ETFs or if that’s too complicated he suggests that you just buy a target date fund, and be done with it.
In Barron’s “How to avoid the most common and costliest mistakes in retirement portfolio investing”  Karen Hube identifies the three costliest mistakes as: (1) inattention to asset allocation (not just U.S. large company stocks and U.S. intermediate bonds, but also small, value, growth, foreign stocks and foreign and emerging market bonds and real estate), (2) trying to time the market (actually studies show that investors pile in at market is tops and abandon the market at bottoms- buy high and sell low), and (3) inattention to costs (expenses, fees associated with the funds- 0.5% higher annual fees can cost a $1,000,000 portfolio almost $100,000 over 10 years)
Jon Chevreau in Financial Post’s “Active mutual funds still lagged index funds in 2007”  reports the results of the latest studies show that in 2007 (again) the vast majority of actively managed mutual funds underperformed the S&P TSX index. Specifically only 8.4% outperformed the index over the last five years. (This should come as no surprise to regular readers of this website; 2-3% management fee headwinds plus other costs are difficult to overcome with stock selection)
Globe and Mail’s Rob Carrick reports on simple ways to add commodities to your portfolio in “Commodity futures can spice up holdings” . Some of the suggested holdings are iPath Dow Jones- AIG Commodity Total Return Index and the Elements Rogers International Commodity Total Return Index. These are both ETNs, which are “are bond-like securities that promise the returns of a particular index” and “will mature at some point (the range is 15 to 30 years from now) at a value determined by the underlying index. There are no interest payments with ETNs, and no guarantee that you’ll get your upfront investment back.”
In Globe and Mail’s “Counting the ways to hate PPN’s” Rob Carrick points out that PPN (principal protected note) holders not only underperform because of their very high fees but also because of their particular strategies to try to protect principal prevents them from fully participating in the upside of the market. At times of high volatility, these funds use so-called ‘dynamic asset allocation’ or in effect become aggressive sellers as markets decline. Rob points out that while you might expect such a (buy-high sell-low) strategy from amateurs, you’d certainly expect better from pros. He also points out that just 12 of 31 PPNs, in the Globefund.com database with three year histories, beat the returns that investors could have gotten on 5 year GICs.
And finally, Noreen Rasbach in Globe and Mail’s “The price is right with ETFs”  reports that she polled 10 of her friends last week and not one of them heard of ETFs! She then proceeds to give an excellent overview of what they are. (But to me the real story is about the dismal state of investor education. I did send her a note suggesting t that she may wish to forward to her friends the link to my website, but I am beginning to wonder if in fact there may be a large proportion of the population, perhaps even a vast majority, who are not only not inclined to be ‘do it yourself’-ers but may not even be interested to get educated enough to become more knowledgeable customers of advisors. This is at a great cost to their retirement nest-egg!)
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