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Recommended reading, economic debates, predictions and opinions.
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dakota
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Post by dakota »

The following may be the Toronto Star article Dakota is referring to
Yep :)
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Post by Taggart »

The Australian

Local shares world class

By David Uren

February 17, 2006

A study by investment bank ABN AMRO shows that the superior long-term performance of the Australian market holds, regardless of shifts in the value of the Australian dollar.

http://finance.news.com.au/story/0,1016 ... 02,00.html
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Post by Bylo Selhi »

Taggart wrote:Pension plan wants accuser identified
See also Another private pension plan scandal for more background information.
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Post by Taggart »

Financial Times

Philip Coggan: Everyone wants to be in the exclusive club

Published: February 17 2006 11:45 | Last updated: February 17 2006 11:45

"Alas, being rich is, by definition, a fairly exclusive process. When everyone else has the same investment idea as you, it is time to think again."

http://news.ft.com/cms/s/bdc57c48-9faa- ... e2340.html
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Post by Taggart »

Wall Street Journal

GETTING GOING

By JONATHAN CLEMENTS

Twenty Tips for No-Nonsense Investing

February 19, 2006

LINK

I would add one more to this. Can't exactly call it a tip, more a question?

Where's the financial advisor for the little guy? You know the one that will take "any size" account even for a new client just starting out in investing. The type of advisor who can act almost like a "personal trainer" in the investment world, and not try and do a selling job. This financial advisor would not have to be a specialist to my way of thinking, but can act as a broker or intermediary (no fees or commissions for doing this) to specialists in the finance industry. In other words, an advisor who can lead the client to the most effective low cost products, and if necessary to effective planners who would charge a reasonable hourly rate for the services rendered.
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Post by Taggart »

Posted on Sun, Feb. 19, 2006

Real world a far drop from index numbers
Inflation, taxes and trading expenses must be considered

E.S. BROWNING
Wall Street Journal

Measured the usual way, the Dow Jones Industrial Average has been flirting with a record lately. If only the real world worked that way.

http://www.charlotte.com/mld/charlotte/ ... 909445.htm
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Post by brucecohen »

Taggart wrote:Posted on Sun, Feb. 19, 2006

Real world a far drop from index numbers
Inflation, taxes and trading expenses must be considered
I did similar number-crunching and printed an article in Investment Executive in early 2003 and a recycled version in the National Post a few weeks later. Here's the text. I don't know how to do the coding required to display the tables. FWIW, the article had absolutely no impact on the marketing practices of financial companies and advisors.
Historical returns are less than they appear

Financial advisers may be creating undue expectations as they try to reassure clients who’ve grown weary of stock market losses.

The bear market has sent advisers and mutual fund companies scurrying for historical data to keep anxious investors onside. Despite periodic downturns, stocks have averaged about 11% a year over the long term, they stress, citing the S&P 500 Composite Total Return Index. Furthermore, they note, this index of large U.S. companies has not had a 10-year loss since the 1930s.

Those statements are true – as far as they go. But they ignore a critical element: fees that are unavoidable, especially for mutual fund investors.

Every mutual fund has ongoing fees. They are deducted directly from the fund and are separate from any sales, redemption or wrap fees you might pay directly. There is no explicit dollar and cents disclosure of what this costs you each year. Rather, these fees are expressed in percentage form as a “management expense ratio.” A 2% MER for a $100 million fund means built-in fees cost unitholders $2 million.

Mutual funds include these costs when calculating their returns. But market indices don’t. Table 1 shows how deducting fees from the S&P 500 would affect the assurances above.

Costs hurt growth

As financial companies keep noting, the pure S&P 500 index did average 10.2% a year for 1926-2002 and 11.1% for the 50 years from 1953. But those returns fall to 8.8% and 9.7% if you apply an MER of 1.28%. That is the median for large cap equity funds sold in the U.S., according to Chicago-based Morningstar, a mutual fund reporting service. Half the funds charge more and half charge less.

A gap of 1.4 percentage points may not seem like much, but it hammered long-term growth. Financial industry charts show $1 placed in the pure index in 1926 closing 2002 at $1,776. But $1 invested in the fee-adjusted index would have reached just $683 – 62% less. That’s because the MER reduced the first-year value and its compound growth every year thereafter. And, this shortfall does not reflect the brokerage fees a fund pays to trade securities, an expense not included in the MER.

The impact was much worse at 2.75%, the median MER for U.S. large cap equity funds sold in Canada, according to Toronto-based Morningstar Canada. Compound annual returns fell to 7.3% for 1926-2002 and 8.1% for the past 50 years. The $1,776 value that looks so impressive on market charts plunged to just $225 after deducting fees.
Equities did, however, still beat other asset classes. For example, the U.S. and Canadian dollars were almost at par 50 years ago. One U.S. dollar invested in the 2.75% fee-adjusted S&P 500 would have been worth $50 at December 31. One Canadian dollar kept in five-year guaranteed investment certificates grew to $30 over the same time, based on average rates in the Bank of Canada database.

Rather, the point is that historical index returns can foster a false sense of confidence. For example, many advisers have so embraced the stocks-average-11% mantra that they assume diversified portfolios will reasonably average 8% -- or even 10% -- a year. If U.S. stocks – the best performing asset class over time – have averaged 7-8% after fees, how can your RRSP average 8-10% if it also contains bonds and cash, which tend to under-perform stocks? If you target 8% with 60% of your plan in equities averaging 7.5%, your other holdings must average 8.75%.

That’s just considering fees, not the debate among investment analysts on whether we now face an era of much lower stock returns. Equities’ performance was heavily skewed by 18 extraordinary years from 1982-1999, history’s greatest bull market. The pure S&P 500 grew from $1 to $134 during 1926-81. It then soared to $534 by the end of 1989 and rocketed to $2,846 by the end of 1999, just before the bear struck. Legendary investor Warren Buffet has urged U.S. companies to slash their target pension plan return assumptions from 9-10% to about 6.5%. What about the target for your own RRSP?

Table 1 also tests the assurance that stocks don’t lose money over 10-year periods. That was true, except for the decade through 1974 when the fee-adjusted S&P 500 fell just shy of breaking even. But see how often stock investors endured multi-year periods with average annual returns below 5%.

Passive versus active

Many advisers believe active managers overcome the impact of fees. See Table 2, which summarizes a fee adjustment on the S&P 500 priced in Canadian dollars. The returns are higher than Table 1’s because of the declining Canadian dollar. When the Loonie falls in relation to the Greenback, U.S. holdings gain value, and vice versa. Though a 2.75% MER substantially lowered the hurdle, 75-85% of Canada’s large cap U.S. equity funds still trailed the fee-adjusted index. If your funds have lagged their benchmarks for several years, why not check out low-cost index and exchange-traded funds?

The bottom line: the stock market may reward patient investors over time, but perhaps not as much as you and your adviser think.

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Post by Taggart »

>>>FWIW, the article had absolutely no impact on the marketing practices of financial companies and advisors.<<<

From a recent article, perhaps a typical example of what you're referring to here, Bruce?

"With an Investment Horizon that extends beyond seven years, a portfolio should be primarily equity. An Equity portfolio is a stock based portfolio.

One research source that proves this comes from Ibbotson Associates: Stocks, Bonds, Bills and Inflation. The average of returns since 1926 from the Standard and Poor's 500 Index (S&P 500) was 11.2 per cent, from government bonds 5.3 per cent, and inflation averaged 3.1 per cent. After in inflation stocks averaged 8.1 and bonds 2.2 per cent."

LINK

No mention in the article of what impact the "active" management fund expenses are going to be on the portfolio's returns over the long run, in addition to the advisors own fees to the client. What's also missing from the article is that at one time or another, all three of these Nobel prize winners have recommended investors buy low cost index funds.
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Post by Taggart »

Statistics prove history is not bunk

By Jonathan Davis

Published: 25 February 2006

Here are some more interesting findings from the just-published "Global Investment Returns Yearbook" from the London Business School and ABN-Amro, with comments from me.

LINK
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Post by Bylo Selhi »

Taggart wrote:Statistics prove history is not bunk
There's lots of good stuff here so c'mon, lift up that kimono a bit higher ;)
Jonathan Davis wrote:First, equities provide the best long-run returns. This is generally true - and as it should be, as they are riskier than other asset classes. Nevertheless, the argument for the superiority of equity returns is heavily dependent on US (and to a lesser extent UK) experience. Many markets have had different experiences at different times...

Second, a pattern of boom and bust in equity markets has been the norm. The post-2000 bear market was actually one of the worst in magnitude in the record...

The third observation is that diversification pays. It does. While several countries have delivered higher returns over the past 105 years than an aggregated world market index, the volatility of the world market is lower than any of the 17 leading markets whose records go back to 1900. The worst single-year return from the world market (minus 34 per cent in 1931) is also lower than that of any individual country...

Fourth, bond markets are notoriously vulnerable to inflation. They are. The long-run compound real rate of return from government bonds has been 1.6 per cent, against 2.5 per cent for Swiss bonds, 1.9 per cent for US bonds and 1.4 per cent for UK bonds, but the experience has been very different in times of low and high inflation. Several other countries, including Germany and Japan, have negative long-run rates of return on bonds.

One consequence of these figures is that investors who are used to demanding a 3 per cent premium over inflation to buy gilts may be being unduly cautious. If (and it is a big if) central bankers have indeed learnt how to control inflation effectively, we should all be getting comfortable with buying bonds on lower premiums. This has in fact been happening in recent years.

Finally, value and small-company shares have produced the best long-run returns historically...
So maybe 1.5% RRBs aren't so bad after all?

Added: See also this news release [PDF]
This year’s study takes a close look at the role of currency exposure in portfolio management and challenges the widely held view that equity markets supported by strong currencies will produce favourable returns. Using data since 1900 for all 17 countries and also for a broader sample of 53 countries, the authors show that instead, equity markets experiencing currency weakness are more likely to outperform...

“A key strategic issue for global investors is whether to hedge their foreign-exchange exposure. Our analysis shows that while hedging reduces risk, the gains from risk reduction have declined over time and are now modest compared with the gains available from diversifying equity portfolios internationally”...
And from last year's edition:
ABN AMRO distributes the Yearbook to its institutional investment clients, journalists and the media while London Business School makes it available to other users. To obtain a complimentary copy, institutional clients of ABN AMRO should contact Jackie Shenton (Jackie.Shenton@uk.abnamro.com), while members of the press and media should contact Adrian Rimmer (Adrian.Rimmer@uk.abnamro.com). All others should contact Stefania Uccheddu (succheddu@london.edu) who can provide copies of the Yearbook at £100 each.
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Post by parvus »

Bruce wrote:
Financial advisers may be creating undue expectations as they try to reassure clients who’ve grown weary of stock market losses.

The bear market has sent advisers and mutual fund companies scurrying for historical data to keep anxious investors onside. Despite periodic downturns, stocks have averaged about 11% a year over the long term, they stress, citing the S&P 500 Composite Total Return Index. Furthermore, they note, this index of large U.S. companies has not had a 10-year loss since the 1930s.

Those statements are true – as far as they go. But they ignore a critical element: fees that are unavoidable, especially for mutual fund investors.
James Daw wrote:
"The RBC Dominion Securities Strategy Focus List has returned 18.2 per cent since its inception in 1984," the President's Club investment adviser wrote in a letter addressed "Dear Investor."

A graph showed that $100,000 invested in a selection of 20 favourite companies, each reviewed quarterly in light of economic conditions, would have become $3.3 million over a period of 21 years.

That sum is four times what buying the entire S&P/TSX Composite Index would have produced by slogging along at an average annual return of 10.1 per cent, the graph showed.

Wow, I thought when the letter arrived in the mail, I would love to meet an actual client who followed that advice.
<snip>
Was this return actually achieved? Can you produce audited records to prove it? Did someone design the strategy in 1984? Was it possible to put $5,000 into 20 different stocks back then? Does the reported return take into account brokerage fees? What sum of money would be required to follow the same strategy starting today?
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Post by Taggart »

Trading currencies not for the amateur

Thursday, February 23, 2006

LINK
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Post by Taggart »

How to spell shrewd? Try Desmarais

KONRAD YAKABUSKI

From Friday's Globe and Mail

MONTREAL — The French expression rire dans sa barbe -- literally, to laugh in one's beard -- pretty much sums up what the Desmarais family, Canada's most accomplished international deal makers, must be doing this week.

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Post by Taggart »

Posted on Thu, Mar. 02, 2006

Gobbling up hard assets is a misguided strategy

By Jonathan Clements
WALL STREET JOURNAL

LINK
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Post by Taggart »

The Boston Globe

Still preaching his gospel

By Steven Syre, Globe Columnist | March 2, 2006

"This is why Bogle can walk into a room filled with more than 160 people who make their living in money management, as he did in Boston last week, and spend an hour over lunch telling them how their business is being run down by conglomerates too dedicated to the pursuit of a buck.

An hour earlier, Bogle had professed concern over how he would be received by the sold-out audience. ''It's a very, very tough speech," he said. Surely he knew better.

The investment managers listened before questioning him gently over dessert. Then they formed a long line in the hall to buy autographed copies of his book."

LINK
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Post by Taggart »

From Dutch history, an exuberant lesson

By Russell Shorto The New York Times

FRIDAY, MARCH 3, 2006

http://www.iht.com/articles/2006/03/03/news/tulips.php
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Post by Taggart »

The Independent-UK

Between euphoria and Armageddon

By Jonathan Davis

Published: 04 March 2006

We all know that it takes two to tango, and thousands to make a market. There would be no need for financial markets if investors did not have regular differences about what the future holds. Yet I find it difficult to recall a time when there have been such contrasting views about the sustainability of current market trends.

LINK
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Post by Taggart »

Australian Securities & Investments Commission

'Pie In The Sky' (PITS) Awards

LINK
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Post by Taggart »

CNN Money

Do money managers earn their keep?

A reader is concerned his portfolio of low-cost funds isn't good enough...can high-priced management help?

By Walter Updegrave, MONEY Magazine senior editor
March 7, 2006: 5:35 PM EST

http://money.cnn.com/2006/03/07/pf/expe ... /index.htm

QUESTION: I have my retirement account diversified among six different funds whose annual expenses range from just under 0.4 percent of assets to roughly 1.1 percent. But I'm considering rolling my money into a "diversified investment portfolio" that divides my money among a variety of investment options.

The pitch is that my money will be overseen by a fund manager who will use his professional judgment to re-allocate and re-balance my account. My concern is that I'll be charged 2 percent a year. Help! I'm a science teacher, not a financial expert. Do you think I would be better off switching to this account?

ANSWER: It sounds to me that what you're getting is a glorified asset allocation account -- basically a manager diversifying your money among a variety of different asset classes -- and that you're paying a premium price for that service.

In fact, if you calculate the average fee you pay for the six funds you currently own (and, hey, you're a science teacher, so get to it), I wouldn't be surprised if you find your annual expenses would double if you go with the diversified portfolio option.

I'm not saying the manager won't do a decent job for you. But the question is, can he or she can add enough value to justify a fee of 2 percent of assets a year?

How well can you do on your own?

The answer depends in part on how well you can do on your own. If your six funds represent a decently diversified mix of assets that is appropriate for a person of your age and risk tolerance -- or you're willing to do a bit of work to create such a portfolio -- then I'd doubt that any manager is going to show much of an improvement in results while also skimming an extra 1 percent per year off returns.

If, on the other hand, your six funds aren't so much a coherent portfolio that represents a real strategy but are just a collection of "funds that looked good at the time" -- and you're not up to the task of turning that motley collection into a real portfolio -- then you could be better off even after paying the higher fee.

So the question you've got to ask yourself is this: Am I willing to do a little work to make sure I've got a balanced portfolio? Or do I want to pay someone else 1 percent of my account value year after year after year to do this for me?

Cover the bases

All in all, I'd say that if you're willing to put in a couple of hours a day for several days, you should have little trouble putting together a perfectly decent portfolio. Remember, perfection isn't the standard because no one -- not you, not even some professional manager -- knows how to build the perfect portfolio.

What you're trying to do is create a portfolio that covers the bases as far as different asset classes are concerned and that has reasonable fees. And once you've arrived at that decent portfolio, remember to rebalance annually to bring it back to its original proportions.

Or, you could pay 2 percent a year and have someone else do this for you. Just remember, though, that the extra money you're shelling out is money that you could otherwise be spending in retirement.
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Post by Taggart »

US to pursue fraud claims against Mario Gabelli: report

Wed Mar 8, 2006 3:46 PM ET164

NEW YORK (Reuters) - The U.S. Justice Department will pursue civil fraud claims against investor Mario Gabelli, alleging that he was at the center of a scheme to deceive the government, a report said on Wednesday.

The allegations involving Gabelli, one of the best-known money managers on Wall Street, relate to the auction of cellular telephone licenses between 1995 and 2000, the on-line edition of The Wall Street Journal reported.

LINK
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Post by Norbert Schlenker »

Nothing can protect people who want to buy the Brooklyn Bridge.
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Post by Norbert Schlenker »

I half considered putting these in the humour thread in Soap Box but as it's financial ...

Devil's Dictionary entries - stocks
Devil's Dictionary entries - bonds
Nothing can protect people who want to buy the Brooklyn Bridge.
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Post by Taggart »

Journal Of Financial Planning

2006 April Issue - Article 9

How Independent Advisors Select Independent Products

http://www.fpanet.org/journal/articles/ ... 6-art9.cfm
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Post by Taggart »

Sun, Apr. 02, 2006

Chicago Tribune columnist Gail MarksJarvis

H&R Block IRAs likely won't cover retirement

But if you are one of the people who have opened what H&R Block calls "Express IRAs," your good intentions probably have been foiled.

About 85 percent of the roughly 500,000 people who put money into Express IRAs since 2002 have lost some of it, according to New York Attorney General Eliot Spitzer. His office sued H&R Block, claiming it misled investors about what they were getting. Puny interest payments and costly fees were destined to erode savings of low- and moderate-income people who struggled to start IRAs, according to the complaint.

The complaint said average customers, who put $323 into an IRA, have earned only $3 in interest each year, but paid more in fees than they earned in interest.

The company strongly disputes Spitzer's charges, contending that it did people a favor by helping them cut their tax bills and start to save for retirement.
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Post by Taggart »

Financial Times(UK)

By Stephen Schurr
Published: March 20 2006 20:56

Gamblers profit holding a strong hand

"There is a hedge fund manager so secretive that few industry veterans know he exists, yet he ranks among the world’s best ten investors. A former employee says, “When it comes to investing, this manager is the world’s greatest poker player.”

Equating one’s investment acumen with gambling may seem the quintessential back-handed compliment. But in the mind of the former colleague, he is giving his old boss the highest praise."
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