Index funds/ETFs - Questions

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AltaRed
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Post by AltaRed »

Norbert Schlenker wrote: The reason I say it involves real work is that, although successful investing is in the end simple, the process of getting to and having confidence in that simple answer is not.

Many investors cannot get there. They might be incapable of understanding the argument. They might be too lazy. They might be too busy. They have to have a coach or, if you like, an expensive bully to get them to do the right thing. The coach will cost them a fortune, which none of us posting here think is a good thing. But if there's no coach, then it is presumptuous to think that Joe Average will end up on the efficient frontier instead of rolling GICs at the bank.
Very well said. It is now very easy for me to see an effective and time efficient way to successfully invest with benchmark performance in the market performance range. I could have never said that in the mid to late '90s. It took persistence and a lot of personal time to obtain the knowledge and confidence to DIY effectively.
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Post by YogiBear »

All these are good points, but WADR they sort of beg the fundamental issue.

Whatever the actual proportion of investors who can "get there" (for lack of a better term), we are only counting a minority of the potential numbers. What of the large majority of potential or actual retail investors whose idea of investing is what they see and are told by the multi-billion dollar financial services advertising machine? How many of them, given the chance, might also "get there"?

That was my point- that given an opportunity to learn of an alternative to the default, high-priced, highly-intermediated retail investing model that exists now for Canadians, many more investors than are currently the case would find a way to "get there". But learning of alternatives is extremely difficult in the face of the avalanche of marketing for the default approach, and gaining the confidence to try them once aware is even harder, given the subtle "you are not capable, but give us your money and everything will be taken care of" message that is being constantly conveyed.

No one can know what the potential proportion of retail investors who could "get there" actually is- but my submission is that it is a great deal more than the actual proportion that exists today. Of course, there will always be those critics who will say that it is all a matter of free choice, and who am I to think I know what is best for others? But I don't know "what is best"- I only believe that retail investors should truly have a "free choice", by being aware of what the marketing avalanche does not reveal. A default choice born of a lack of knowledge of any reasonable alternative is not "free choice"- it is dependence, no matter how enlightened some may claim it to be.

As I stated upthread, I refuse to write off that potential on the grounds of current ignorance or disinterest: "With a little education and encouragement ... it is worth considering how many retail investors could save themselves a lot more than the equivalent of "minimum wage", and learn to take charge of their financial futures, instead of being kept in a state of ignorant dependency on money-spinning active management."
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Post by parvus »

Carry on!

I'm enjoying this.

I should add (being a somewhat long-winded poster myself) that, as much as one tries to keep on topic, once one's got a train of thought in mind it's difficult not to follow it through to conclusion — while the minutes tick by and turn into quarter-hours — and then one wakes up the next day wondering about having left oneself exposed to sarcastic retorts and sharp elbows from other posters over a minor allusion or clever turn of phrase that was tossed off, fortuitously, as a witty aside but is now magnified into a sweeping judgement. :shock:

(BTW, I'm not necessarily generalizing, just being a little phenomenological about my own experiences of the process of writing a long-winded post, in the course of which I sometimes find me mocking myself. :roll: )

As for the substance of the issue, I wish someone would look at the other side of the equation sometimes, viz.: maybe a higher cost fetches returns better than what one otherwise would have gotten at the bargain basement. (Oh, oh, fortuitous witty aside. :oops: )

Yes, you can apply that to folks who cleave to GICs and thus miss the equity premium. But I'm actually thinking of active management here — whether it's posters buying individual stocks, or buying value managers or slicing and dicing passive investment vehicles such as ETFs and index funds.

To give an example: I'm wading through stacked-up papers today, and trying to get rid of them. I came across an article about natural resources funds that suggests strong correlations between commodity markets and commodity stock prices. I happen to own Sprott Canadian Equity. I could, I suppose, parcel out my exposures to to XGD, XEG, XMD and XMA to the same effect, with an MER of ~60 bps versus 285 for Sprott (plus incentive fees). Would it be worth my while to do so in what I consider a highly inefficient set of market sectors, for what is 7% of my portfolio?

Of course, the question wouldn't emerge if I were a total market investor. But I'm not. Is anyone? However, that's what's assumed, at least implicitly, in calculators that track the forgone return due to management fees (which, interestingly, include regulator costs, including the costs to put together such a calculator: but we needn't tarry very long in that Alice-in-Wonderland world).

Still, the assertion that one gives up x% in returns over 20 or 30 years in active management can only be evaluated in the context of an appropriate benchmark. Sure costs matter. So do returns. Cheap exposure to a benchmark with a long drawdown, e.g., TOPIX, isn't especially helpful, although dollar-for-dollar, you've spent less to lose money by indexing than you would have with a second-quartile active manager.

In my instance, I would rather have had an active manager (Cundill?) pick over the TOPIX than buying the whole damn thing myself. But, as always, I could be wrong (is that a sharp elbow I feel :wink: ).

All the same, I don't think that anyone here subscribes to a rigid market-cap-weight approach to investing (otherwise everyone would have twice as much fixed income as they do equities, since world bond markets are roughly twice the size of equity markets).

As a consequence, any overweight equity decision requires a prospective evaluation of the risk premium and the best vehicle to deliver it, at the best cost. Is it an investable index? Is it a margin-of-safety approach, with concentrated exposures that may include off-index and/or illiquid securities?

There is a cost-risk-reward tradeoff here. I'm not sure what it is (go ahead, make my day! :oops: ).

What that benchmark is, whether it should be an absolute return tethered to a person's requirement to build a retirement portfolio that can be annuitized, or whether it should just be keeping up with the Joneses investable indexes is nevertheless a fascinating discussion— from which escapes insights and sometimes "executable" bits of information — even if occasionally the crossing of swords results in minor flesh wounds.

Okay, I'm going to get whacked now (or is it slashed?). :wink:

(Added: The problem with being long-winded is the higher likelihood of typos. :oops: )
Last edited by parvus on 10 Feb 2007 16:24, edited 2 times in total.
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tidal
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Post by tidal »

Hola!

I am writing today from Cuba! We are cycling near Holguin! Suprising amount of climbing...

Cuba! One of only three populations on the planet that still does not believe that free markets, by and large, get prices right (the others being North Korea and active investors)!

But just like cycling, where few people are interested in simply, say, following the Canada Food Guide for their nutrition, opting instead for protein powders, "good carbs vs. bad carbs" and glycemic index and on and on and on (and ignoring for now the more aggressive stuff).... it's not human nature to accept advice like "eat a balanced diet, don't eat too much, exercise more"... or "be diversified, keep costs low, stay the course"... but you just need to look around you at pocketbooks and waistlines, etc., to see the cost of that human nature ignoring that advice is...

It's like Warren Buffett says (my best recollection): "Investing is simple. But it's not easy." And what he means by that is that left to their "human nature", investors will opt for easy, but not simple... A pill that helps them lose weight instead of exercise and diet... A guru that will help them get rich quick, instead of planning a course of action and sticking to it... Stochastics and moving averages and arbitrage over indexing...

By the way, the most common complaint that presents in a general medical practice is "general malaise"... some description by the patient of some combination of vague aches and pains, lack of energy, trouble sleeping, over-sleeping, etc. Once a compentent G.P. rules out anything really wrong, they often suggest that the patient get some regular exercise, watch their diet, coffee, booze, cigarettes, set regular sleeping hours, etc., and come back in about 4 weeks. Do you know what about 85% of the patients do? They go for a second opinion.... None of that "eat your veggies" nonsense for them, NO SIR! They want a BETTER doctor that can fix what ails them NOW with no effort on their part... And you want to know why passive managment is not a favoured option?????

HOLA!!!!
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Post by Norbert Schlenker »

YogiBear wrote:Whatever the actual proportion of investors who can "get there" (for lack of a better term), we are only counting a minority of the potential numbers. What of the large majority of potential or actual retail investors whose idea of investing is what they see and are told by the multi-billion dollar financial services advertising machine? How many of them, given the chance, might also "get there"?
Let's take a reasonable analogy. (This will piss off advisors and fund managers, especially if they used to indulge. So be it.) The prevailing situation in the financial industry, with huge marketing expenses funded out of investor wallets and the result of which is the needless siphoning off of about a third of retirement portfolios, is not much different than the tobacco industry of years past, with huge marketing expenses funded out of smoker wallets and the result of which is a needless reduction in average life expectancy of 4-5 years.

So what's happened? The feds stepped in and basically censored the high cost marketing. The effect has been to turn profitable businesses into hugely profitable businesses because the marketing budgets need not be as large. The clients are hooked already so they are not in fact being helped at all. More clients still get hooked every year by word of mouth. Smoking prevalence has fallen but it's hardly rare, even though we have imposed draconian restrictions on free speech, free press, and the provinces and cities have followed up by banishing smokers to taking a few quick drags while freezing in the alley, and have now resorted to even disallowing that.

I don't smoke, I think others are probably better off not smoking, but I also don't agree that what's been done to deter smoking was justified or justifiable. I don't like censorship. I don't think people should be treated as pariahs because they engage in a little vice. (Forget second hand smoke. That will drag us way off topic.) Heavy weaponry has been deployed in the fight against tobacco, including outright falsehoods, and people still smoke.

Much as I would like investors to do a better job of investing, to spend less while doing so, and to end up with more money at the end of the day, I would not like to see measures employed like those that were employed against tobacco. I helped set up this forum because I thought it would be useful and I still believe that it is useful, but I will not pretend that it is improving the financial acumen of more than a microscopic fraction of the population. It is a microbe on the hind leg of a flea on the backside of the elephant that is the financial industry's marketing machine, but I would not support shooting the elephant.

Do I think mutual fund companies tell lies by omitting pertinent facts? I do. Do I think advisors tell lies by omitting pertinent facts? I do. Do I think mutual fund companies bribe advisors to tell lies? I do. Do I think it would be better if somebody told the whole truth? I do.

That's what my practice is for. That's why I recommend a few books and sites and columnists to read, and only a very few. That's why I did my little bit to set up this forum.

But I won't lie to myself or anyone else about wide spread effectiveness. This forum shows people what is (in my opinion) a better way but it is doing so one person at a time and it demands a commitment of time and thought and energy and focus that too many don't want to give. Even with the interaction here, the positive reinforcement, the "Yes, that's the way to do it, you're doing fine", it's absolutely peanuts compared to what the average advisor can offer across a desk. The average advisor is a salesman and salesmen are famously good at presenting value propositions and countering objections and making people feel warm and fuzzy about their decisions. It takes a rare person to buy what's being sold at FWF (or by me at Libra). There's no marketing budget. There are no freebies. Worst of all, there is work involved by the investor.

In an earlier thread, I toyed publicly with the idea of setting up a real mutual fund, where the investors owned the fund manager. There were good responses in the thread but it's slipped down my list of things to do. In the end, I was not convinced that, "If you build it, they will come." Most people don't know what they need or why X is good for them, so they have to be told or taught. That's marketing, it costs money, which means it costs everyone who's already in the fund money. You can call it a chicken-or-egg problem or the market not providing a public good, but it's a problem nonetheless.

It's a depressing prospect. Retail solutions are either too expensive - think any typical Canadian mutual fund - or require considerable thought by the investor - think FWF. Worthwhile wholesale solutions are in fact available but, because of the blizzard of information and the great variety, they are either too expensive - think any typical wrap - or require considerable thought by the investor - think building an asset mix, implementing with low cost product, and leaving it alone. No one offers a "This is good enough , it's cheap, and you don't have to give it a second thought" product. That's what is really needed.

That's enough despair for the day. I won't even whack parvus. I'm going to fix the boat's heater instead.

And I expect a prescription for my ailment from Dr. Yogi when I get back. :D
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parvus
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Post by parvus »

tidal wrote:
Cuba! One of only three populations on the planet that still does not believe that free markets, by and large, get prices right (the others being North Korea and active investors)!
So says Rex Sinquefield at DFA, time and time again. Then again, DFA isn't exactly a market-cap-weight org that believes that markets get prices entirely right. Hmmm. Enjoy your vacation (he says as the temperature hits -10C) and turn off your blackberry! :wink:
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Post by HardWorker »

Wow, I definitely got more than I asked for. And for that I most humbly thank you all :D

One personal perspective I'd like to add that you "heavy weights" might not realize, is that you're very likely helping a lot more than you think. On any given forum, where a poster asks a question, there are very likely a few more regulars that'll learn something, and even more lurkers will read and learn something, and in turn will turn around and pass the info to others around them. The argument that people on sites like FWF are but a sliver of the population is very valid, but even that small portion will grow and grow over time. Those who will put the time and effort in will reap the benefits, and those who won't, oh well, their loss.

Its funny how today's investors have so much more information at their finger tips, yet on the flip side its abundance is also hindrance (as I posted in another thread). None the less, I think we definitely have it easier today than Buffet did when he started out. What the hell did we ever do before the internet?

Thanks again everyone, your valuable time and contribution has not gone to waste. You may not have the billions like Buffet, but this form of philanthropy is just as effective.
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Post by jiHymas »

YogiBear wrote:
jiHymas wrote:The investment management industry, as a whole, will attempt to sell people what they want to buy.
Bull. The "investment management industry, as a whole, will attempt to sell people" what they are able to sell- just like any other industry.
If you want to believe there's a significant difference between the two statements, go for it. It comes to pretty much the same thing in the end, particularly with respect to this particular discussion:

You cannot sell people something they do not want to buy.
YogiBear wrote:
jiHymas wrote:I don't think anybody thinks that a step back to the old days would constitute economic progress - when, basically, Joe Average would put his money in a bank, full stop. If Joe Average can capture the equity premium for a MER of only 2%, he's way ahead of the game.
Straw man alert! The debate is not between wanting to "step back to the old days ... when, basically, Joe Average would put his money in a bank" and an MER of 2%. That is a false argument. The point is whether "Joe Average" (isn't somebody complaining about patronising attitudes? "Joe Average"? That's not patronising?) "can capture the equity premium for a MER of only [sic] 2%", or whether he "can capture the equity premium for a MER" of 0.25% or less. I trust that the long term benefit of that 1.75% MER advantage is evident.
A careful reading of my posts, Yogi, will reveal that I take the view that most people will not want to do the work and take the necessary responsibility to achieve those 0.25% MERs (which are achievable only through direct investing or index investing).

To achieve this careful reading, I suggest you reconstruct my entire paragraph by adding the initial sentence:
jiHymas wrote but YogiBear didn't wrote:On the whole, it's a good thing.
Further analysis of my post should be enough to convince most critics that I am arguing that the investment industry, 2-3% MERs and all, is a net public benefit. Sure, some people can do better. Name me a single mass market industry that can't be done better by somebody willing to understand the product and recreate it. Computers can be built at huge savings by people willing to order the parts and assemble them on their kitchen table. So what? That doesn't make the computer sales industry useless or unethical.
YogiBear wrote:I recall an over-generalized and "unsupported statement" upthread to the effect that "the time required to become comfortable with investing (if only in ETFs) is sufficiently long to make it an incredibly boring worse-than-minimum-wage job for most people."
Oh, do you recall that? You asked me on what basis I was making that claim and I told you. Then you had a YogiSnit.
YogiBear wrote:
jiHymas wrote:I also get annoyed when people are so utterly clueless as to suggest that one book ... and a few hours a year are all that's required for expertise in investing.
Yet another straw man alert! No one has suggested that "expertise in investing" is obtainable in that fashion.
Christ almighty, Yogi, don't you even read your own posts?
YogiBear wrote:How much time is required to read, say, Bernstein's Four Pillars book, then go to one of several websites and discover a Canadian version of a basic "couch potato" portfolio allocation? Then to create a CAD-US-EAFE-Bond portfolio from no load bank index funds? And thereafter spend a couple of hours a year contributing and rebalancing?
Or are you suggesting that one does not require expertise before investing one's life savings?

Or what? If you didn't mean one of the above, what on earth did you mean?
YogiBear wrote:The point is that a retail investor does not need to become an expert in order to put the odds of long term investing success on their side. Some basic knowledge- such as can be acquired through several books- and some independent thought provide a perfectly adequate starting point for many people. Some will then spend additional time to plan and implement their own portfolio, while others will hire a fee-for-service advisor to carry out the planning for them.
Finally, a valid point! You forgot to mention though, that some will prefer to ignore the whole thing and put themselves in the hands of their advisors, and that there is a whole continuum of possibilities.

How about that! A whole continuum! And the more effort you put into the exercise, the more profit you'll take out. Gee, sounds a lot like the rest of life.
YogiBear wrote:Oh, and I'm quite intrigued with your little suggestion that you will have "a lot more respect for Bylo & Yogi when they get a license, convince real people that their advice is sound and take the heat when the market's down." So- only licensed professionals can disagree with you without incurring your scorn? Otherwise, the ignorant plebes had best keep their contrary mouths shut, lest the righteous wrath of jiHymas descend on them from on high ...? :lol:
What an utterly idiotic remark.

Your position - insofar as I can determine what it is - is that the investment management industry is largely useless and largely parasitical, given that one book and a few hours a year is sufficient for anything one might want to do with one's entire life savings.

So my challenge to you and any other arm-chair critic of the industry, is to take your arguments out of this forum, where you are comfortably preaching to the converted, and see what real people actually think of investing their real life savings.

Get yourself a license, hang up your shingle and go out into the real world, Yogi, just once, just to see what people really think of your wonderful idea that nobody needs any more than a single book and a few hours per year. See how far it gets you. See what their portfolio winds up being.

But, frankly, I don't think you have the courage to do that. I don't think you have the courage even to talk to people like arnyk's parents.

Get out of your ivory tower, Yogi! If the investment management industry is doing such a lousy job, let's see you do a better one!
YogiBear wrote:The point made was that it was possible to invest at much lower cost than that attributable to active management, and in particular to do so without requiring a great input of time and effort.
Of course it's possible. And, for the great majority of people, it just ain't gonna happen.
byloSelhi wrote:As for credentials, hasn't Mr Hymas railed in previous threads against those who use the letters after their name to bolster their arguments? So why must "Bylo & Yogi ... get a license" in order to "convince real people that their advice is sound"?
Because otherwise, your efforts will be utterly meaningless. All you are doing on this forum is preaching to the converted. Get yourself a license so you can go on the rubber chicken circuit and convince the general public to buy ETFs.

The general public, bylo! Not just the infinitesimal fraction thereof who are interested enough to seek out discussion forums on the subject of investing.

Talk to members of the general public - not just people who frequent this forum and read your posts - about investments, while being in a position to give them concrete help, and then you might be in a position to give an intelligent response to the question "Why aren't index funds/ETFs more popular?"
byloSelhi wrote:As for responsibility and accountability, judging by (a) what I read in the media that's written by some (by no means all) highly credentialled advisors and (b) how few credentialled financial advisors ever get sanctioned by their SROs or xSCs, I don't quite see how adding a CFP to my name would make any practical difference on that front.
Sanction by SROs and xSCs is an extreme step, suitable only for fraud and egregious negligence. It's hardly appropriate for what's written in the media, outside a fiduciary relationship.

Adding a CFP to your name won't make any difference (although you might learn just what a fiduciary relationship is, and achieve some insight into what powers the bureaucrates that the SROs & xSCs should have). Adding your name to your opinions will. You'll make somewhat fewer boneheaded comments, I'm sure, when acquaintances, colleagues, and others whose opinion you value ask you in person to explain them.
byloSelhi wrote:Going by the "data" that's bandied about by the industry during RRSP season, "Joe Average" has maybe $25k in investments and grows his portfolio by maybe $1,000 per year. Is that the profile of the sort of investors to which this site is supposed to appeal?
I wouldn't think so, but I haven't seen the site's formal business plan.

It is, however, the profile of the sort of investors to whom the investment industry as a whole is supposed to appeal. It is the profile of investors whose skills and needs must be considered in order to give a rational response to the question "Why aren't Index funds/ETFs more popular?".
byloSelhi wrote:why do you participate here?
It's usually enjoyable. I hear views opposed to my own - something which I heartily recommend to you and Yogi. I learn what questions and misunderstandings people have about investments in general and preferred shares in particular, which helps in my work. And it's a change from the usual market/software routine.
YogiBear wrote:What of the large majority of potential or actual retail investors whose idea of investing is what they see and are told by the multi-billion dollar financial services advertising machine? How many of them, given the chance, might also "get there"?
All of them, Yogi. Every single last one of them.

Not everybody springs fully armed from the forehead of Zeus. Anybody who's convinced to take their money out of 1-year GICs and Canada Savings Bonds and put it into a mutual fund is instantly getting more exposure to financial markets. They get literature, they get stories and they have a little money on the table to help convince them to pay attention.
YogiBear wrote: "With a little education and encouragement ... it is worth considering how many retail investors could save themselves a lot more than the equivalent of "minimum wage", and learn to take charge of their financial futures, instead of being kept in a state of ignorant dependency on money-spinning active management."
So get a license, Yogi! Give the yearning masses a little education and encouragement! Talk to some of the real people you feel are so exploited by the industry and see where they tell you to stick your education and encouragement!
NorbertSchlenker wrote:That's what my practice is for. That's why I recommend a few books and sites and columnists to read, and only a very few. That's why I did my little bit to set up this forum.

But I won't lie to myself or anyone else about wide spread effectiveness. This forum shows people what is (in my opinion) a better way but it is doing so one person at a time and it demands a commitment of time and thought and energy and focus that too many don't want to give.
Ah, Norbert, if only there were more like you with some experience of talking about investments outside this forum.
hardWorker wrote:Wow, I definitely got more than I asked for.
:D

Further data can be found in Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds - which has been discussed on this forum (and I wouldn't have known about it otherwise, which is another reason I'm here), but I can't find the thread. It's further support of my thesis that the answer to your question is "Human Nature".
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Post by Icarus »

As an Average Joe, who knows many Averager Joes, I echo some of Mr. Hymas's observations. I have been completely ignorant about investing for years. Now, after many, many hours of reading and after developing an unhealthy addiction to this forum, I consider myself slightly less ignorant. I still feel nervous venturing out on my own with my family's savings and with no one to hold my hand, even though I know enough to do it. In the end, I'll probably pay someone to help me out, at least at the beginning -- although on a fee-for-sevice basis.

My mother and her husband just retired. They had been going to an FA for many years. She showed me his proposed portfolio for them, which consisted of no fixed income. (Okay, there may have been a balanced fund in there.) Most of the "fixed income" was income trusts, not that my mother would have thought to ask anyway (this was before October 2006).

Now you can say that this is just what Yogi and Bylo are talking about: self-serving FAs who breach their fiduciary duty to clients, and I would agree with you. WADR, I think that Mr. Hymas has downplayed the unethical, self-serving behaviour of some (many?) FAs. But at the same time, there is not a chance that she would ever take the time to study about investments, read The Four Pillars of Investing or learn about EMH, not even with me to point the way. Manage her own e-funds through TDWH? Forget it!

In the end, I hooked her up with a non-commisioned advisor who put her into a lower-cost option (in an organization that is not available to the general public). They use tactical asset allocation (i.e. market timing) which I disagree with, and I expect her return will be lower than if she used some of the other advisors I suggested. But she and her husband are more comfortable with this organization, and it was their choice. That comfort has a price tag, and I'm happy to have her pay it. She'll be much better than she would be in GICs in the long run (I hope), which is the point Mr. Hymas was making. I'd have settled even to have her with a commisioned advisor who created an appropriate portfolio for her, 2-3% MER, DSCs and all. I still think she would have done better than GICs, which was the other realistic option.

I find this stuff interesting, so I waste a lot of time on it. My knowledge still barely scratches the surface. Most people I know have zero interest, and so they pay someone else a lot of money to help them. That's their choice, and it's not necessarily inappropriate. There are expoitive elements in the financial services industry, and they should be condemned. But I think FAs get a rough ride here, sometimes unfairly. I've noticed a lot of FAs that used to post on old threads no longer do (or have been banned). I think the forum is a poorer place for it.
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Post by jiHymas »

Icarus wrote:Now you can say that this is just what Yogi and Bylo are talking about: self-serving FAs who breach their fiduciary duty to clients, and I would agree with you. WADR, I think that Mr. Hymas has downplayed the unethical, self-serving behaviour of some (many?) FAs.
Oh, there's plenty of unethical, self-serving FAs out there - although I would want to know more about the specifics of your mum's particular case before before venturing an opinion on the one you're talking about.

If you're sufficiently sure of your ground, you may wish to send him a letter explaining to him why he has lost the account. Politely, of course, very fact-oriented (with only one opinion, clearly labelled as such), just saying "I don't think blah-blah-blah was appropriate for a couple with the profile blah-blah-blah". Copy to compliance, copy to the OSC.
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Post by Shakespeare »

Oh, there's plenty of unethical, self-serving FAs out there
I'm quite willing to believe - based not on knowledge of FA's but of human nature - that there are more incompetent FA's than unethical ones - and that both are a minority.
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Post by jiHymas »

Shakespeare wrote:
Oh, there's plenty of unethical, self-serving FAs out there
I'm quite willing to believe - based not on knowledge of FA's but of human nature - that there are more incompetent FA's than unethical ones - and that both are a minority.
I agree with you.

And I'll also say that for some, at least, of the FAs I know, expected performance is not the one-and-only factor in fund selection - not even the dominant factor. Customer service, in all its various forms, is much more important.
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Post by YogiBear »

Norbert Schlenker wrote:And I expect a prescription for my ailment from Dr. Yogi when I get back. :D
Ah damn. It's all well and fine- and occasionally even marginally fun- to have a bit of rough stuff with the neighbourhood apologist ... but I've seen Libra's website, and the approach you take with clients. I'm defanged- straightening you out is going to feel a bit like dating my own sister ... :lol:

Let me try this point: No one can prove the number of Canadian retail investors who might potentially "get it", beyond those who already have- you and others have presented your views on why the numbers of potential newbies are (very?) restricted, I and others have proposed otherwise. But in the end, we are all guessing, based on various opinions about that most readily understandable of phenomena, "human nature" ... :roll:

Let me, therefore, offer one little bit of circumstantial, but rather more concrete, evidence: consider for a moment the respective proportions of retail investors in Canada versus the US who have adopted a low-cost indexing approach. I cannot find at the moment the figures I once had to hand, but if memory serves, the difference between the two countries is almost an order of magnitude (5-10 times proportionally as many US retail investors primarily index as in Canada).

Now, before the Peanut Gallery speaks up, I realize that some of those opening Vanguard accounts to buy index funds are doing so in order to trade as frequently as the rules allow, or to follow the latest hot sector/ region fad. And I also acknowledge that even in the US, where indexing has a relatively high profile, and where Vanguard has a great deal of name recognition among retail investors (notwithstanding some well-known active funds, as a shop that is primarily identified with indexing), indexing as a retail philosophy is still a minority approach.

Yet, we are talking about Canada. And if we assume that retail investors on both sides of the 49th parallel are fundamentally similar in outlook (an assumption, to be sure), that still leaves a massive number of Canadians, who currently do not do so, who could potentially be interested in indexing- perhaps, analogizing from the US proportions, as many as 5-10 times more than presently is the case. Yet they are not doing so. Why not? It cannot be due to that all-purpose evidence-avoider, "human nature". If there is another reason, other than the suffocating, know-nothing dependence that they have learned from the industry, then what is it?

As for the chicken-and-egg problem of reaching these people, without incurring marketing costs that would destroy the advantages of the indexing approach- maybe it is time to step back, and listen to some of those investors about whom we have been discussing. They might tell us how the word can- and, slowly, will- get out that there is an alternative available:
HardWorker wrote:One personal perspective I'd like to add that you "heavy weights" might not realize, is that you're very likely helping a lot more than you think. On any given forum, where a poster asks a question, there are very likely a few more regulars that'll learn something, and even more lurkers will read and learn something, and in turn will turn around and pass the info to others around them. The argument that people on sites like FWF are but a sliver of the population is very valid, but even that small portion will grow and grow over time.
I could not have said it better myself. Shame, Norbert- you are Canadian indexing's Sir Percival, whose heart is pure enough to find enlightenment, but who stumbles at the very last step to completing the quest! Buck up, man- we are not defeated until we despair. My prescription is to book an appointment with the closest commission-based FA you can find who doesn't know you, and tell him/ her that you just inherited, say, 5 million, and that you want to invest it, but that unfortunately you don't know anything about money matters- then watch "human nature", aided and abetted by the industry infrastructure, go to work ...
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Post by YogiBear »

jiHymas wrote:
YogiBear wrote:
jiHymas wrote: <snipped because of endless circular repetition by someone who is so obviously smarter than the rest of us there really is no reason why anyone in their right minds would even dream of disagreeing with the opinions that are deigned to be handed down from on high- repeated endlessly and with scant regard for considering and replying to the actual views- instead of those he wants to read- of those brave lunatics who question the most sacred Dogma According To J>
Geez, I hate to disturb the cozy little love-in you've got going here- did it restore your psychological security? I would never have known there were so many profound experts in the mysteries of "human nature".

You see, the first date was fun and all- to a point, but amusing nonetheless ... but now you want another one right away? To simply repeat the same old games? You really don't have enough imagination to think of anything new or different?

Oh and BTW- you really shouldn't also throw your allies overboard when you try feeding your enemies to the sharks. There are some posters here who have more or less agreed with you who- AFAIK- are not licensed. Does that make their opinions worthless- or does that judgment only extend to those who disagree with you? Those who agree are, of course, spared all petulant rages ...

Don't gnaw at yourself too hard in the dark reaches of the night ... sweet dreams ... and happy outrage! :lol:
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Post by Norbert Schlenker »

YogiBear wrote:Yet, we are talking about Canada. And if we assume that retail investors on both sides of the 49th parallel are fundamentally similar in outlook (an assumption, to be sure), that still leaves a massive number of Canadians, who currently do not do so, who could potentially be interested in indexing- perhaps, analogizing from the US proportions, as many as 5-10 times more than presently is the case. Yet they are not doing so. Why not? It cannot be due to that all-purpose evidence-avoider, "human nature". If there is another reason, other than the suffocating, know-nothing dependence that they have learned from the industry, then what is it?
The difference between "Canadian human nature" and "US human nature", perhaps. You cannot deny that Canadians are much more dependent than USians.
My prescription is to book an appointment with the closest commission-based FA you can find who doesn't know you, and tell him/ her that you just inherited, say, 5 million, and that you want to invest it, but that unfortunately you don't know anything about money matters- then watch "human nature", aided and abetted by the industry infrastructure, go to work ...
Thanks. You've made me laugh. That and the sailing today, fickle wind notwithstanding, have improved my mood considerably.

And thanks to HardWorker for the encouraging words.
Nothing can protect people who want to buy the Brooklyn Bridge.
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Post by Gus »

YogiBear wrote: Yet they are not doing so. Why not? It cannot be due to that all-purpose evidence-avoider, "human nature". If there is another reason, other than the suffocating, know-nothing dependence that they have learned from the industry, then what is it?
I'm a fairly recently converted indexer and DIY investor and I'm not licensed to give financial advice, although I did scrape through the advisors' test that Norbert posted some time ago. (And, sorry James, Gus is not my real name).

I have tried to share my low-cost indexing epiphany with several friends and have failed, in all cases. I even sometimes left a copy of "The Naked Investor" on their bedside table while they stayed at my place, like some kind of Gideon's Bible . I don't bother any more, they think I'm a crank. So, I'll try to to illuminate Yogi's question with a few anecdotes - does anyone have any real data?

1) For some, paying high management costs in some kind of high-net worth financial advice relationship with a bespoke brokerage house is a positional good. It's as if I am trying to tell someone to trade their BMW in for a Hyundai. "The gas mileage is way better and they are much less likely to get stolen..."

2) Most of these people have done very well in business or academia. Obviously, they are smarter than the average bear (sorry). They know that Uranium or Google is going to outperform and they know more about the specifics of these investments than I do, so it's no use arguing with them.

3) They get hot tips from advisors who have an inside track on junior oil companies. The retired academics tend to fall for this one. They always win, every time and they always have great weather when they go on vacation. The oilmen I know don't gamble in junior oil stocks, unless it's in their own company, so I guess that's not gambling.

4) They have no clue about how well they are doing relative to the index. When it's up, as long as they are up, that's OK. How much doesn't matter.

5) They don't know how much they are paying in fees and they think it unseemly to ask.

6) They think they have better things to do than DIY investing and, they do. Yet, they will change their own oil, manage their own rental properties, drive across town to save 2 cents a litre on gas etc. Investing, especially indexing, is just too boring for most people.

Sometimes, Yogi, education and understanding is not sufficient. As Homer Simpson told his daughter: "Lisa, just because I don't care doesn't mean I don't understand".
Money ain't got no owners, just spenders. Omar Little
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Post by YogiBear »

Gus wrote:So, I'll try to to illuminate Yogi's question with a few anecdotes - does anyone have any real data?

<snip>

Sometimes, Yogi, education and understanding is not sufficient.
Several of your anecdotes are familiar from my own experience with friends and family- and as I noted in my prior post to Norbert, even in the most indexing-positive market in the world, the US, retail indexing is still a minority approach. But in relative terms, as a proportion of total population, it is still much more popular than in Canada.

ISTM that is the relevant question- not whether every retail investor will index (no one has ever said they will)- but why is there such a (presumably, assuming proportionate potential interest) large number of potential indexers in Canada who have not taken the plunge:
Norbert Schlenker wrote:The difference between "Canadian human nature" and "US human nature", perhaps. You cannot deny that Canadians are much more dependent than USians.
No, I cannot deny it. And I suspect that you have hit on the real, underlying issue- that my stated assumption "that retail investors on both sides of the 49th parallel are fundamentally similar in outlook" is probably not tenable.

But here is the rub, Norbert- when you talk about "Canadian human nature" and "US human nature", you are really talking about culture, not immutable, biologically determined "human nature" as much of the upthread drivel would have it. And unlike biological imperatives, cultural biases are subject to short-term change- inevitably and constantly!

Where there is change, there is opportunity in education- again, not to turn everyone into indexers, far from it. Rather, to inform and educate that substantial minority of Canadian retail investors who, based on my analogy, have a pent-up, unrealized potential interest in indexing, but who are currently too locked into an industry-dependent mode of high-priced, "active" investing to even be completely aware of the option.

And that, Norbert, if I may be permitted to belabour this poor beast beyond all endurance, is why your work, and Bylo's, and that of many others, must continue- because what has been learned, to the relative financial detriment of so many retail investors, can be unlearned, as with any cultural artifact. Notwithstanding the apologists, there are many, possibly a great many, Canadian retail investors who- given some indication of how and why it is possible- would be willing and able to index, either DIY or with the assistance of a fee-based advisor. They deserve to make the choice to do so or not freely- not have it made for them by dependence on industry interests, or by evasive invocations of some undefinable notion of "human nature". Surely helping them assert that right is worth the effort.
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Post by Bylo Selhi »

Gus wrote:Sometimes, Yogi, education and understanding is not sufficient. As Homer Simpson told his daughter: "Lisa, just because I don't care doesn't mean I don't understand".
Not knowing and/or not caring can be the result of ignorance. But it can also be the result of profound understanding. Perhaps what Homer is really saying simply echos:
Warren Buffet wrote:By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb.
Jason Zweig wrote:The ultimate beauty of index funds is that they get you utterly out of the business of guessing what will happen next. They enable you to say seven magic words: 'I don't know, and I don't care.'
Perhaps too, the acquisition of the level of understanding that enables people to "not care" is simple but it isn't easy.
YogiBear wrote:And that, Norbert, if I may be permitted to belabour this poor beast beyond all endurance, is why your work, and Bylo's, and that of many others, must continue- because what has been learned, to the relative financial detriment of so many retail investors, can be unlearned, as with any cultural artifact. Notwithstanding the apologists, there are many, possibly a great many, Canadian retail investors who- given some indication of how and why it is possible- would be willing and able to index, either DIY or with the assistance of a fee-based advisor. They deserve to make the choice to do so or not freely- not have it made for them by dependence on industry interests, or by evasive invocations of some undefinable notion of "human nature". Surely helping them assert that right is worth the effort.
What the above-average bear just said.
Sedulously eschew obfuscatory hyperverbosity and prolixity.
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YogiBear wrote:There are some posters here who have more or less agreed with you who- AFAIK- are not licensed. Does that make their opinions worthless...
James' point, I believe, is that you'll get a better perspective if you are in the position of: a) giving advice directly to individuals; b) having such activities overseen by regulators; c) having people depend on you; and d) being fully accountable to people not only when you make an error but even when you do what's right and you still disappoint your client.

I have received more than a couple of (not-so-nice) phone calls resulting from something I've posted in this or other forums. I've received the odd piece of hate-mail because I railed against (or said good things about) a company, product, strategy, etc. in an article. I hand people invoices for my advice, which makes me ultimately accountable. I even recognize the odd client of mine poking in this forum.

Be in that position and I think you'll have a little different perspective on the advice that is suitable for people, what people really respond to, and what they're ultimately going to do. I can't tell you how many times I've been asked for advice, only to see people do something totally different.

When I get asked about investing by friends and family, it's about what's HOT, not about what's smart long term. That is the nature of most people. One must have confidence in whatever path is chosen. Without that confidence, the first sign of uncertainty will send the person way off the original path (so much for buy and hold).

It's easier to have confidence in somebody who's been investing and advising others on how to invest for a very long time. And that's why people use advisors.
Norbert Schlenker wrote:The difference between "Canadian human nature" and "US human nature", perhaps. You cannot deny that Canadians are much more dependent than USians.
One difference I've documented is that Canadian mutual fund investors hold onto their funds roughly twice as long as their American counterparts. That's a direct result, I suspect, of the high level of "dependency" on financial advisors and, probably, to pending exit fees for dumping a fund.
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Post by tidal »

YogiBear wrote:not immutable, biologically determined "human nature" as much of the upthread drivel would have it.
The name of this thread is "Why aren't Index Funds/ETF's more popular?".

To dismiss "human nature" as a contributing factor is as much a mistake as entirely attributing it as THE factor.

Is there some guesswork involved? Sure. Is any statement about "human nature" definitive? Probably not.

But that doesn't mean it has no bearing on the topic at hand.

If anything, I think that the adoption of index funds/etf's is following a well-observed (albeit controversial) pattern for many other goods and services... "Diffusion of Innovation" Theory...

"for any given product category, there are five categories of product adopters:
Innovators - venturesome, educated, multiple info sources, greater propensity to take risk
Early adopters - social leaders, popular, educated
Early majority - deliberate, many informal social contacts
Late majority - skeptical, traditional, lower socio-economic status
Laggards - neighbours and friends are main info sources, fear of debt

...adopters of any new innovation or idea could be categorized as innovators (2.5%), early adopters (13.5%), early majority (34%), late majority (34%) and laggards (16%), based on a bell curve...

...the rate of diffusion is influenced by:
The product's perceived advantage or benefit.
Riskiness of purchase.
Ease of product use - complexity of the product.
Immediacy of benefits.
Observability.
Trialability.
Price.
Extent of behavioural changes required."

see http://en.wikipedia.org/wiki/Diffusion_of_innovations and http://en.wikipedia.org/wiki/Early_adopter (Granted, that is "pop science", but the concepts are worth considering...)...

I think you are seeing this pattern in indexing/etf adoption. I think that "immediacy of benefit" and some of the other issues will make it a gradual adoption. And it will never be 100% adoption in any event (else the price-discovery system actually would not work as efficiently...).

Is that human nature? I think so. Is it relevant to the discussion? I think so.

(Just as an aside, I think that this model has been posited as explanatory for the both the spread of smoking in western culture, and the spread of smoking cessation in western culture... although in neither case did the adoption of either get to 100%, let alone in the sub-categories of innovators, laggards, etc....)
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Post by YogiBear »

DanH wrote:It's easier to have confidence in somebody who's been investing and advising others on how to invest for a very long time. And that's why people use advisors.
Yes. Thank you for your post, Dan. It is important to keep in mind that this discussion is not about pro- or anti-advisor. An advisory relationship based on explicitly invoiced fees-for-service can be an excellent, even necessary, part of a low-cost investing approach for many people (the exact proportion of those using an advisor vs DIY is not relevant here).

As for the licensing issue, as I've tried to explain at length, it is a red herring. The issue of readiness to try indexing, or not, has been cast as an exclusively "human nature" issue, when it clearly is not exclusively so. We can all agree that many- perhaps the majority- of retail investors will never index (because of "human nature"), and that is fine. But there are also many- I would assert, based on the evidence I presented upthread, very many- retail investors for whom "human nature" is irrelevant to a potential decision to index. Other causes are restraining the exploration, at the very least, of the potential (whatever the final decision), and those causes have nothing to do with "human nature".
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Post by YogiBear »

tidal wrote:
YogiBear wrote:not immutable, biologically determined "human nature" as much of the upthread drivel would have it.
The name of this thread is "Why aren't Index Funds/ETF's more popular?".

To dismiss "human nature" as a contributing factor is as much a mistake as entirely attributing it as THE factor.

Is there some guesswork involved? Sure. Is any statement about "human nature" definitive? Probably not.

But that doesn't mean it has no bearing on the topic at hand.
C'mon, tidal, you of all people ... The full quote from which you extracted the above is:
... when you talk about "Canadian human nature" and "US human nature", you are really talking about culture, not immutable, biologically determined "human nature" as much of the upthread drivel would have it.
Of course "human nature" is relevant- as I repeated in my prior post to DanH. But as the full extract quoted indicates, there are a subset of those who do not index, for whom not doing so was not a product of human nature. A difference between US and Canadian indexing rates- unless you believe that there is something biologically different on either side of the border- can only be explained in cultural terms.

In other words, if one assumes identical underlying biologically-determined "human nature" in both populations (I hope no one objects to that assumption ...?!), and if "human nature" was the sole causal element, indexing rates in both countries should be similar. But they are not- so why not?

So biology may act as a first filter, if you will- but then culture becomes the dominant issue, and culture, as I pointed out, is eminently amenable to change over time. Which brings me to your excellent further contribution to the discussion ...
tidal wrote:If anything, I think that the adoption of index funds/etf's is following a well-observed (albeit controversial) pattern for many other goods and services... "Diffusion of Innovation" Theory...

<snip>

I think you are seeing this pattern in indexing/etf adoption. I think that "immediacy of benefit" and some of the other issues will make it a gradual adoption. And it will never be 100% adoption in any event (else the price-discovery system actually would not work as efficiently...).

Is that human nature? I think so. Is it relevant to the discussion? I think so.
My only point here is that one should be very careful, again, about positing "human nature" as an explanation for behavioural patterns. Human behaviour is far too complex to be explainable in such biologically reductionist terms- the cultural aspect is necessarily a part, since any biological imperative can be satisfied in an infinite number of culturally-determined ways.
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Post by NormR »

YogiBear wrote:It is important to keep in mind that this discussion is not about pro- or anti-advisor.
:lol: :lol: :lol:

Yogi has turned into a comedian.
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Recovered our stamina, have we? :lol: :lol: :lol:
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Post by YogiBear »

NormR wrote:
YogiBear wrote:It is important to keep in mind that this discussion is not about pro- or anti-advisor.
:lol: :lol: :lol:

Yogi has turned into a comedian.
Cheers, Norm- glad to see we can count on intelligent input from you that advances the discussion, as always ... :lol: :lol: :lol:
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