The explosion in exchange-traded funds (ETFs) in Canada continues with the launch of five new funds in September by Purpose Investments . I had the pleasure of talking to Som Seif (CEO) and Ross Neilson (Vice President, Sales) over dinner recently to get their take on where Purpose fits in the investing landscape. ( Disclosure: Som paid for my dinner, but if you think that affects what I write, you should see how many times per week I turn down offers of far more than the cost of a dinner to place “guest” posts on my blog that masquerade as real content.) Som Seif is a very smart, high-energy guy who started Claymore back in 2005 and now runs Purpose Investments. Ross Neilson is no slouch himself, but even he tends to sit back and watch Seif go. Som shows passion and communicates clearly in a way that I think is likely to resonate with a significant fraction of investors who hear him speak. I don’t know how his funds will perform, but I wouldn’t bet against Purpose Investments ...

Here are my posts for this week: Antifragile A Reader Question about Choosing Winning Mutual Funds Here are my short takes and some weekend reading: Mr. Money Mustache explains some wealth advice that should be obvious, but isn’t. Larry Swedroe reports on studies showing that active bond funds won’t protect you in a bear market. With the current fear of rising interest rates, no doubt some investors will try active bond funds anyway in the hopes of avoiding losses. Canadian Couch Potato doesn’t think that now is the time to abandon bonds. Where Does All My Money Go? knocks off a few cobwebs and features a podcast with Som Seif who launched Claymore back in 2005 and is now CEO of Purpose Investments. My Own Advisor gave a great summary of the 2013 Canadian Personal Finance Conference that was held in Toronto last weekend. I had a great time at the conference and enjoyed answering questions as part of a panel. Many thanks to Mark Goodfield, a.k.a. The Blunt Bean Co...

A long-time reader who prefers to remain anonymous asked an interesting question about a strategy to pick winning actively-managed mutual funds. Here is an edited version of his question: I'd love to hear your input on a friendly discussion with a good friend on active mutual funds versus passive indexing. I fall on the indexing side of the debate but I'm having trouble finding flaws with the approach he's been using. He looks for 5-star active funds with "low-risk, high-return" characteristics as dictated by Morningstar and/or Scotia Research, then selects funds that have performed better than the group average over short and medium term (1 month to 3 years) under the same management. He will then hold these funds and review every 3-6 months or so, selling them if they no longer exceed the group average returns. Whenever I pick a suitable index (regardless of asset class, though he favors Canadian and Global Small Cap), his funds have almost always done co...

Nassim Taleb’s latest book Antifragile is hard for me to describe succinctly. It contains a number of interesting ideas that made me think, which is a very good thing. On the other hand Taleb sets a new standard for incomprehensible meanderings. Taleb sees himself as part philosopher, but I can usually understand the writings of philosophers. Two of Taleb’s previous books had messages important in shaping a sound investing strategy. Fooled By Randomness teaches that we tend to mistake skill for luck and see patterns when there is just randomness. Most sensible investors should conclude that they do not have the skill to trade against investing professionals even if they feel like geniuses in a rising market. Taleb’s The Black Swan teaches that extreme events are much more likely to occur than standard theory based on the Gaussian bell curve predicts. However, I preferred the treatment of this subject in Benoit Mandelbrot’s earlier book The (Mis)Behavior of Markets . Inves...

Here is my post for this week that drew quite a few reader comments: One Thing Investors Must Do for Themselves Here are my short takes and some weekend reading: Potato does some analysis to show that renting out part of your house doesn’t help all that much to make Toronto’s high house prices more affordable. Dan Hallett points out problems with floating rate note (FRN) funds that some investors like because they don’t have to lock in long-term fixed rates and suffer if interest rates rise. The trouble is that these funds carry significant risk that isn’t properly reflected in fund risk ratings. Big Cajun Man had some post-dated cheques stolen from his son’s school which led to him paying several stop payment charges. A fee of $12.50 seems manageable until you have to pay it 10 times, but not 11 as his bank tried to charge him. Million Dollar Journey answers a reader question about which type of investment account is best for holding Canadian index ETFs.

Despite my enthusiasm for do-it-yourself investing, I understand that most people need help. The problem is that far too many investors who seek help end up just being sold expensive mutual funds. This got me thinking about what is the minimum that investors need to do for themselves; what one thing can they not afford to leave to their advisors? Here is my suggestion: All investors should be able to work out for themselves how many dollars they pay per year in fees across their portfolios, including management expense ratio (MER) costs, fund loads, commissions, and any other costs. Instead of focusing on the “top ten things to look for in a financial advisor,” investors would do well to learn enough to be able to protect themselves from bad advisors and recognize good advisors. I think the knowledge required to add up portfolio costs is a great starting point for learning how to evaluate advisors. Reasonable financial advisors should be able to help their clients understand ...

My posts for this week: Getting Some Money Back from Tyco Stock Mystery of the Missing Month of Savings Here are my short takes and some weekend reading: Potato tells the amusing story of an article making fun of traders who seemed to confuse stock tickers on different exchanges. However, these traders didn’t seem so confused after all. The Blunt Bean Counter explains how CRA could hit you with a 20% penalty on unreported income. My Own Advisor explains why he isn’t a fan of mortgage life insurance. Big Cajun Man has his wife give a turbulent account of trying to get a cheap hotel room.

If you save $1000 per month and earn no interest, you’ll have $12,000 at the end of one year. What if this goes on for two years? You might naively think you’d have $24,000 saved, but an authoritative source says this isn’t right. According to the Globe and Mail’s Pay Yourself First calculator, you’d only have $23,000 saved after two years of saving $1000 per month.  (As of 2016 Nov. 2, the Globe and Mail finally dropped this calculator from its web site.) To see this, punch in an annual salary of $100,000 with 0% for the salary increases and 0% rate of return, and set the “pay yourself” rate at 12%, with one year of saving. The result is a retirement fund of $12,000 as you would expect. Now bump it up to 2 years of saving. The retirement fund jumps to $23,000. I’m not sure where the missing month goes, but apparently every year after your first year of saving you lose a month. After 3 years of saving you have $34,000, and after 10 years you have $111,000. I first wrot...

When Tyco stock cratered a little over a decade ago, I was one of many investors who lost a lot of money. Tyco was sued for allegedly overstating their financial results and paid a $50 million settlement. A couple of years ago I was invited to share in the spoils of this settlement . I had thought that my claims were rejected but was pleased to receive a small cheque in the mail recently. My share of the settlement was only 0.18% of my losses on Tyco stock, but somehow it felt good to get this token amount. At $18 returned for each $10,000 I lost on Tyco stock, this settlement doesn’t make up for much, but it gave me a warm feeling anyway. I don’t miss my days of poring over company financial statements looking for stocks to buy. I don’t expect to participate in any more investor lawsuits.

My posts for this week: More Buy-High and Sell-Low Advice The Physics of Wall Street Here are my short takes and some weekend reading: Freakonomics has a great story about someone in the U.K. who found a way to profit from telemarketers. My Own Advisor takes a run at calculating his “enough” number – how much he needs per month in retirement. Million Dollar Journey finally answers the question of how the blog will change once Frugal Trader hits the magic million-dollar net worth mark. It turns out that the blog won’t simply shut down :-) The Blunt Bean Counter clarifies some of the new T1135 reporting rules on foreign investments. Big Cajun Man seems to have a talent for prompting CRA to ask for proof of some of his tax slips. Maybe when I don’t get reviewed by CRA it’s a sign that I’m not taking enough deductions.

The book The Physics of Wall Street , by James Weatherall, is a fascinating account of the advances in understanding financial markets made by physicists. The book delves into the personal lives of physicists who made their fortunes on Wall Street and gives an overview in clear language how they made their money. It’s possible to get something out of this book even if you don’t know much about the mathematical side of investing, but it is primarily for readers interested in advances in the math used by quants over the years to beat the market. For example, the book explains the difference between normal and Cauchy distributions and the range of other stable distributions between these two. Benoit Mandelbrot showed that the pattern of investment returns are wilder than the normal distribution and are better modeled by the more complex distributions between normal and Cauchy. Over time, each physicist had to come up with progressively better methods to beat other investors who qu...

Here’s a quote from Andrew Allentuck in this weekend’s Financial Post: “If you are paying more in management expenses and commissions than you get in dividends and capital gains over a period of three to five years, consider changing portfolio mix or managers who created the mix.” Basically, this means “if your portfolio goes down over three to five years, make a change.” This is bad advice in a couple of different ways: 1. During most three to five-year periods, this is a very low standard. If the markets rise by 5% per year over three years and your investment fees consume this entire gain and more, you’re paying wildly excessive fees. 2. Most times that stock markets have a serious correction, the three-year return will be poor. Allentuck’s advice has you making a change when markets are down. Investors tend to seek safer investments when stock markets are down. This advice drives buy-high and sell-low behaviour which is devastating to long-term returns. Investors woul...