Archived Articles • 2002


December 2002

We spend the year accumulating wealth.
Now is a good time to share it with those who are less fortunate.

Make an online donation to any of Canada's 80,000 registered charities. Get a tax receipt by e-mail within 48 hours. Services are provided at no cost to either charity or donor.
Donate now!

John Campbell’s investment advice: a holiday gift [Dec02] A Harvard finance professor gives his students a Christmas gift of timeless investment advice. Print this. Frame it. Follow it.

The New Vocabulary of a Declining Market [Wall Street Journal, 29Dec02] [If link has expired, search Archive for "clements", then select Dec. 29] "Here are 33 handy excuses for saving too little or making foolish investments, plus translations for what each excuse really means."

Last-minute gifts for the literate investor [Financial Post, 21Dec02] "Some financial books can cost you money. These won't ... the knowledge imparted by the best of them can save readers thousands of times their price."

Active case for passive investing [ Dallas News, 15Dec02] and A New Scorecard for the Active Versus Passive Debate [ Standard & Poor's, 31Oct02] "The S&P Indices Versus Active Funds Scorecard reports give performance comparisons corrected for survivorship bias, show equal- and asset-weighted peer averages, and provide measures of style consistency."

Mutual Fund Secrecy [ NY Times, 14Dec02] "mutual fund directors, officers and managers are the agents; the fund shareholders are the principals. It is management's responsibility to act solely on their behalf. It would thus seem self-evident that each mutual fund shareholder has the right to know how the shares of the corporations in his or her portfolio are voted. Such shareholders are partial owners of these stocks, and to deny them that information would stand on its head the common understanding of the principal-agency relationship."

It's time for companies to give clients a break [Toronto Star, 13Dec02] "In good times and bad, MERs in Canada—which are much higher than those south of the border—exert a considerable drag on returns. We just didn't notice them as much when the financial markets were doing much better, as they were in the late 1990s. ... the median Canadian equity fund returned an average annual 0.1 per cent over the past three years ended Oct. 31, and has a median MER of 2.78 per cent."

Is the Market Rational? [Fortune, 03Dec02] "Daniel Kahneman, when asked by a CNBC anchorman the day after his Nobel was announced in October what investment tips he had for viewers, responded, 'Buy and hold.' ... The dirty little secret of the behavioralists is that, for all their work on investor irrationality and market anomalies, they still believe that markets work pretty well and that trying to outguess the collective wisdom of millions of investors is usually futile. ... What does it mean for you? That's easy: Buy and hold. Diversify. Put your money in index funds. Pay attention to the one thing you can control—costs—and keep them as low as possible."

Lots of consumer help on money matters [Globe & Mail, 05Dec02] "With the opening of the Centre for the Financial Services OmbudsNetwork last week, five agencies are now devoted to protecting the interests of consumers in their relations with banks, brokerages, sellers of mutual funds and insurers."

Fund industry's sound of silence [Financial Post, 03Dec02] "New proposed regulations from the OSC and the U.S. SEC would require mutual funds to disclose how they voted their proxies at annual and special meetings of the companies they invest in." See also Investors have a right to know [Globe & Mail, 05Dec02] "Pension and mutual funds have enormous clout in today's investment world, but few obligations."

Bylo rebuts  Indexing caused "devastating losses" [Financial Post, 02Dec02] A letter to the editor attacks Jon Chevreau for advocating low-cost indexing, "people who followed his advice have suffered devastating loses." And the truth? "Devastating losses," perhaps. Not by indexing, but rather by not indexing.


November 2002

Indexing Has Benefits in Both Bear and Bull Markets [Vanguard, Nov02] "Over 15 years, 79% of all U.S. equity mutual funds underperformed the market, while just 21% outperformed it net of fees. Performance data from European and global markets tell a similar story, even before costs are subtracted from the equation. Over 3-, 5-, 10- and 15-year periods, the markets outperformed approximately 80% of European and global diversified equity funds on a gross of fee basis."

A Conversation With John Bogle [SmartMoney, 27Nov02] "When you realize each [stock] purchase involves a sale and each transaction involves a cost, you have to wonder where all the witchcraft is that says the active managers can win. The record is bereft of any evidence that active managers win."

Ottawa's Internet site on charities starts clicking [National Post, 26Nov02] "[CCRA ]has just made a major upgrade of its Web site that will allow anybody to get detailed information about any one of Canada's 80,000 registered charities. The information available includes addresses, names of directors, a breakdown of activities, the amount spent on fundraising and how much capital the charity has."

Problems with Manager Universe Data [SSgA, 22Nov02] "After simple adjustments for the most common forms of bias, the median manager statistics for each of three manager universes I evaluated are entirely consistent with the notion that the average active manager underperforms its appropriate benchmark due to the presence of transaction costs and management fees."

You save so that they can prosper [Financial Times, 15Nov02] "Mutual fund charges are lower in the US. This is in part due to greater investor knowledge and because costs are a key influence in decision-making. Such 'bargain' active fund management is unlikely to be mirrored in the UK because the UK market is not big enough to generate the required volumes under management that help keep costs down." [Sound familiar?]

Portfolio Analysis in the Crosshairs [Journal of Financial Planning, Nov02] "presents a three-factor model as a tool that can be used by financial advisors to structure and analyze portfolios. ... [The] model facilitates the development of a consistent investment philosophy and enables the analysis of portfolios based on the most recent scientific advances in portfolio management."

Straight talk for experienced investors [Vanguard, 15Nov02] John Brennan on "seven lessons that veteran investors can draw from the experience of the last five years—lessons that can help all of us become better investors moving forward."

B.C. plan would ease purchase of foreign funds [Financial Post, 15Nov02] "Our job is to protect investors who participate in Canadian capital markets. If they choose of their own volition to go outside Canada to invest then, as long as they are getting appropriate warnings about what happens when you walk out the door, who are we to tell Canadians they aren't allowed to do that?" See also New Proposals for Mutual Fund Regulation [BCSC, 14Nov02] and Radical fund reforms pitched [Globe and Mail, 15Nov02]

Autumn 2002 Newsletter [Coffeehouse Investor, Nov02] "Although The Coffeehouse Investor was published four years ago [when] it didn’t much matter what investment philosophy you embraced...the Coffeehouse philosophy is much more important today than in it was in 1998 – by a mile."

Initial confusion [CA Magazine, Nov02] "The financial planning profession is a puzzling sea of acronyms with a deluge of designations contending for the public’s attention. And there’s no solution in sight."

GIC investing measures up [Toronto Star, 12Nov02] "Say that someone was ultra-conservative from the time when registered retirement savings plans, or RRSPs, first became available in 1957, and bought only guaranteed investment certificates, or GICs. How much better or worse would that have been than playing the financial markets?"

iUnits ETFs from BGI Canada More Cost-Effective Than Ever [CanadaNewsWire, 11Nov02] Canadian ShareOwner Investments includes 12 BGI ETFs in its roster, making it even easier and cheaper to buy ETFs in small amounts on a regular basis and to reinvest dividend distributions.

The Oracle of Everything [Fortune, 11Nov02] Warren Buffett: "The bubble has popped, but stocks are still not cheap. ... Investors need to avoid the negatives of buying fads, crummy companies, and timing the market. Buying an index fund over a long period of time makes the most sense." [The rest of the article is highly recommended, too ;-)]

The lasting financial life lessons [Dallas News, 10Nov02] A newly-minted senior citizen reflects on "My Five Great Moments of Personal Finance."

New book harpoons investing industry [Financial Post, 02Nov02] "Wouldn't it be nice to read just one investment book, set your long-term course and ignore the noise of other get-rich-quick books, the financial press, money TV shows and the Internet? ... No matter how knowledgeable you think you are about investing, you can benefit from this book."


October 2002

The Investment Dilemma of the Philanthropic Investor [BFMRC, 31Oct02] "should you seek higher returns by investing in alternatives to U.S. stocks and bonds" using "alternative investments ... such as international stocks, private equity, hedge funds, venture capital, real estate, and so on"?

How much you spend decides how long you can spend [Sun-Sentinel, 28Oct02] "As a rule, withdrawing a percentage of the account value each year allowed retirees to spend more, particularly early in retirement. But here is the catch: To achieve these results, the retiree needed to have her portfolio invested entirely in large-cap stocks, a choice many retirees and most investment professionals may consider too risky." See also Zunna Research.

Journal of Indexes • 4th Quarter 2002 [Oct02] Have It Your Way ("when and how index customization is employed"), Benchmarks For That Other Asset Class ("the unique issues fixed-income indexes face"), ETFs For Advisors ("index funds and ETFs are not always the most efficient choice"), Stabilizing Returns With Derivatives ("derivatives may help dampen risk and bring stability to portfolio returns").

Is That a $100 Bill Lying on the Ground? [Wharton School, Oct02] Malkiel and Thaler debate Two Views of Market Efficiency: A Discussion of Behavioral Finance and Efficient Market Theory. (Hint: If there was a clear winner, the consequences would have already been priced into the market.)

Dive Right in, Siegel Says, the P-Es Are Fine [Business Week, 28Oct02] Siegel vs. Shiller redux: "Siegel is just as bullish now as he ever was, insisting that investors can confidently expect to make an average of 5% a year after inflation over the next 20 to 30 years. ... 'I wouldn't be surprised if we fell below the average p-e of 15, maybe to 10,' says Shiller. 'That would halve the market again.'"

Hidden Treasure [ Forbes, 28Oct02] "Nonprofit Vanguard Group has long been a vocal advocate of shareholder rights and corporate disclosure. So what does the mutual fund giant say about its own executive pay? Just about nothing." Yet, in the past decade, as other fund companies have raised managemet fees, Vanguard has reduced theirs by an average of 15 bp. On assets of $500B, that's a savings to investors of some $750M per year.

Caveat Investor [Globe & Mail, 25Oct02] "Financial gurus like Brian Costello, Garth Turner and Jerry White say they're educating the public. Can they help it if their students fail disastrously?" See also Rogues' Gallery.

After the Fall: What Lies Ahead for Capitalism and the Financial Markets? [BFMRC, 22Oct02] John Bogle reviews the current state of financial markets, then looks at what may lie in store going forward.

Managers get rich while investors lose [CBS MarketWatch, 22Oct02] How US mutual fund company executives "earn" millions of dollars a year, yet the funds they manage lose more than the market indexes. Evidently "professional management" doesn't come cheap. See also 'We're mad as hell' [CBS MarketWatch, 08Oct02] and Fund industry's conspiracy of silence [CBS MarketWatch, 15Oct02] for a laundry list of ways these same companies fail to disclose conflicts-of-interest to their unitholders.

Penny-Wise Parables [Washington Post, 20Oct02] "Every now and then there is a book so meaningful that you can't wait to recommend it. That's how I feel about The Richest Man in Babylon by George S. Clason [first published in 1926!] ... The premise of the book is that basic rules about work ethic, thrift and financial planning don't change over time. ... Take his seven simple cures for a lean purse and you have the opportunity to live a life free of crushing debt and financial stress."

Performance is a thing of the past, but it's not the only factor [The Independent, 19Oct02] "The report ... falls far short of proving past-performance figures have as much value as the industry wants you to believe. The common-sense view is that past-performance data is part of the analysis you should do before choosing a fund, but it is by no means the only or even the most important or relevant information." [This too is hardly news. Go to Investment Aphorisms and see what Dr. Bill Sharpe had to say on this subject several years ago.]

A look inside fund returns [Globe and Mail, 19Oct02] "Your mutual fund company is making good money off you in this bear market. In fact, your fund company could very well be making more money off you than you are from the funds you own. ... the average Canadian equity fund's MER over the past five years ate up more than 100 per cent of its returns and left investors with a loss of 0.5 per cent a year."

Don't Count On It! The Perils of Numeracy [BFMRC, 18Oct02] "My thesis is that today, in our society, in economics, and in finance, we place too much trust in numbers. Numbers are not reality. At best, they're a pale reflection of reality. At worst, they're a gross distortion of the truths we seek to measure."

The Legacy of Modern Portfolio Theory [Institutional Investor, Fall 2002] "Fifty years have passed since the publication of Harry Markowitz's article on portfolio selection, setting forth the ground-breaking concepts that have come to form the foundation of what is now popularly referred to as Modern Portfolio Theory (MPT). In this article the authors briefly explain the theory underlying MPT and using illustrations highlight the application of MPT to the current practice of asset management and portfolio construction. The authors also survey most of the relevant research that has directly or indirectly been either an outcome of MPT or has contributed to the implementation of MPT."

Interview with Gus Sauter, Vanguard Index Fund Manager [IndexFunds, 16Oct02] "We always felt our strongest suit was in a low-return environment. I think we're continuing to see strong cash flows for two reasons. The primary reason is that we're known as a low-cost provider, and people are acutely aware of costs at this point in time. The second reason is that we attract a different type of investor, one that has a longer time horizon than most. Our redemption ratio is half that of the industry."

MEMORANDUM TO: Financial Intermediaries
RE: How We Can Profit From the Experience of Corporate America

[Bogle Financial Markets Research Cente, 14Oct02] Jack Bogle challenges the financial services industries to give their customers a "fair shake."

Math prof tests investing formulas, strategies [Globe and Mail, 12Oct02] His conclusion: "Put as much money as you can afford each month into an exchange-traded fund or index fund and then ignore it, because eventually the market will go up."

Lessons learned [Vanguard, 10Oct02] "Based on this record-length bear market (and the record-length bull market that preceded it)", Vanguard Chairman John Brennan offers "seven lessons that can help individual investors as we move forward."

The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel 2002 [Nobel Foundation, 09Oct02] awarded to Daniel Kahneman "for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty" and Vernon L. Smith "for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms". See also All too human [The Economist, 10Oct02]

A Wall Street Revolution [Fortune Small Business, Oct02] How Jack Bogle revolutionized the mutual fund industry by giving individual investors a fair shake. A brief history of The Vanguard Group as told by its founder.


September 2002

Understanding And Using Inflation Bonds [TIAA-CREF, Sep02] "inflation bonds are a new asset class with several unique features such as inflation protection, low or negative return correlation with other assets, long duration with respect to real rates and low yield volatility. These features make them attractive for saving to match future needs, diversifying portfolio, and assuring a retirement or endowment income stream."

Listen up, Bay Street [Toronto Star, 21Sep02] "Individual investors must help push for the major reforms needed in the investment marketplace, says a former member of the Ontario Securities Commission."

Testing your investment IQ [Toronto Star, 19Sep02] and Investors know less than they think [Financial Post, 19Sep02] How do you measure up? (And what do you intend to do about it?)

Adapting to the Shrinking Equity Premium in Your Life [Paula Hogan, 1Q02] An excellent introduction to the notion of equity risk premium and how it affects investors. "In sum, the world hasn’t changed, but life is moving on. And those who adapt tend to come out all right."

Search for the good news amid market pessimism [Toronto Star, 18Sep02] "To be a successful investor, you need to think long term. ... But how do you think long term when all the short-term news is gloomy?"

Only Fools Fall in ... Managed Funds? [Wall Street Journal, 15Sep02] [If link has expired, search Archive for "clements", then select Sep. 15] "Santa Claus and the Easter Bunny should take a few pointers from the mutual-fund industry. All three are trying to pull off elaborate hoaxes. But while Santa and the bunny suffer the derision of eight year olds everywhere, actively-managed stock funds still have an ardent following among otherwise clear-thinking adults."

Efficient Frontier • Fall 2002 [Sep02] Of God, Mammon, and Mars ("low expected stock returns are a necessary consequence of our society’s good fortune"), The Fiduciary's Six Commandments, The Stakeholder Effect ("The maintenance of property rights can be both a cornucopia and a curse to those who benefit most."), Are Value Stocks Riskier than Growth Stocks?

'Stay the course' or pay the price [Financial Post, 10Sep02] "With media coverage of the September 11th anniversary reaching a crescendo this week, confusion and fear seems rampant among investors and even some financial advisors. ... Consider the following seven investing principles, which I came across at They were posted to the Internet by an anonymous contributor at Morningstar's Vanguard Diehards forum."

Opposite Paths, No Middle Ground [ NY Times, 08Sep02] Sauter: "I'm feeling more bullish now than I did at any time in the latter part of the 90's. If one assumes a long-term average return of around 11 percent for stocks, then the market today is undervalued by something on the order of 12 percent to 24 percent." Tice: "We believe we are in a secular bear market — and we still have a long way to fall. We have so many excesses and imbalances in the system that have got to be worked off and we still are at very high prices in the market ... I'd say it's still 50 to 60 percent overvalued."

Gross predicts Dow 5,000 [CNN/Money, 06Sep02] "The manager of the world's biggest bond mutual fund predicts the Dow Jones industrial average could fall another 40 percent to 5,000 because the stock market remains stubbornly expensive despite a more than two-year decline." See also: Bill Gross' Investment Outlook: Dow 5,000 and Jeremy Siegel responds

Mutual Back-Scratching [Forbes, 16Sep02] "Corporate boards are belatedly standing up for investors and taking a hard line against executive greed. Not so in the world of mutual funds, where directors enrich themselves and rubber-stamp higher expenses--even as their shareholders get pillaged." Bogle: "Investors put up all the capital and take all the risks, yet get only half the market's return. Something is clearly wrong with this system."

Index Providers Must Now be Proactive [IndexFunds, 03Sep02] Vanguard is considering changing several of its largest mutual funds and ETFs from tracking S&P indexes to recently-announced ones from MSCI. The more sophisticated methodologies of the latter benchmarks are expected to lower fund turnover, achieving higher tax efficiency and reducing transaction costs.

How Retirees Can Survive Bear Markets [Wall Street Journal, 01Sep02] [If link has expired, search Archive for "clements", then select Sep. 01] Strategies to insulate a retirement portfolio from the ravages of a bear market in early retirement.


August 2002

Stock market gloom doesn't spell doom for indexing [Vanguard, 29Aug02] "The fact remains that identifying the consistently high-performing, well-managed funds of the future is all but impossible. ... In the end, the facts don't support the assertion that "stock pickers"—those who attempt to buy the stocks that go up and avoid those that don't—have an edge over index funds."

Mug's Game [Economist, 29Aug02] "Yet a few examples [of outperformance] among a cast of many thousands of fund managers offer only small consolation to the average investor. Unless he wants to punt on fund managers as well as on equities themselves, he will almost always be better off—or, these days, rather less worse off—putting his money into an index fund."

A Heart-to-Heart Talk with Jack Bogle [Morningstar, 29Aug02] An update on Jack Bogle's own asset allocation. Also some words of wisdom about the current and what to do about it: "Don't blindly stay the course." "Consider not only the probability of reward, but the consequences of risk."

Vanguard's Bogle Wins $5 Bet From Robert Markman [Bloomberg, 27Aug02] "'A lot of critics of index funds argued that they were going to get crushed in a down market,' [Morningstar analyst Russ] Kinnel said. 'The implication was that all active managers would brilliantly figure out that there was going to be a bear market coming, and sell the day before it started, which of course didn't happen.' ... Morningstar's Kinnel said merging the three Markman funds, which together total about $70 million in assets, also will help hide their track record from investors. 'He's sweeping all that under the rug,' Kinnel said." Markham lost only $5. The people who investedbet their money with Markman lost a lot more.

Eight Vanguard Index Funds May Get New Bogies [Morningstar, 27Aug02] "Vanguard may change the benchmarks for up to eight of its stock index funds, including those following the S&P/Barra growth and value indexes, to a new set of U.S. stock market bogies developed by Morgan Stanley Capital International." See also MSCI US Equity Index Series Methodology Summary and Index Rex: The Ideal Index Construction.

Fraudster broker on parole after 18 months [Toronto Star, 27Aug02] "Former Bay Street broker Michael Holoday, the man behind one of the biggest frauds in Canadian history, walked out of a residential-style prison yesterday after spending less than 18 months there." See also: Greed and glory on Bay St.

The truth about actively managed mutual funds [Financial Post, 22Aug02] "A few years ago index critics noisily argued that index funds would get their comeuppance when the boom went bust. ... The evidence, of course, is that active managers talk a better game than they play. ... Index funds, for all their many faults, and despite how darn proletarian the things are, are the Borg of the capital markets. They march implacably along, assimilating or rolling over all in their paths."

Stay the course, king of indexing says [Boston Globe, 18Aug02] "for most people the big challenge is picking the right mix of stocks and bonds, something that provides adequate growth and security and diversification to meet their long-term goals. For the index fund investor who has his asset allocation in stocks and bonds right, there's one thing and one thing only to do in this market, or any market," says Jack Bogle. "Stay the course."

Portfolio rebalancing keeps your risk tolerable [Sun-Sentinel, 19Aug02] "The objective is not to 'beat the market' or obtain higher returns, but to keep risk to your tolerance level ... rebalancing is counterintuitive because it may require us to put more money in an asset class going through a major downturn. By the same token, rebalancing forces us to buy low or sell high, and isn't that what we want to do?"

Do-it-yourself style investing [Financial Post, 17Aug02] Jon Chevreau profiles DIY investor Shakespeare, "High costs will erode a portfolio slowly. Poor risk management can kill it quickly. Manage the risk and the return will take care of itself."

Larry responds to Bylo rebuts  The problem with indexes [, Jul02] Another attempt to blame indexing for the stock market's woes. If, as the author contends, so many active managers engage in "closet indexing" in order to safeguard their jobs, then what does that say about their opinion of the superiority of indexing?

Tax Man Pockets Nearly One-Quarter of Mutual Fund Investors' Returns [Lipper, 14Aug02] "fund investors in high federal tax brackets needlessly give up several percentage points of return to taxes each year ... losing nearly a quarter of their load-adjusted returns"

The emotional investor [Toronto Star, 06Aug02] "'Behavioural finance' employs insights borrowed from psychology to explain errors investors make"

Believe It or Not, 2 1/2 Years Is Not the Long Term [ NY Times, 04Aug02] "Buy-and-hold investing does not deserve to be any less popular today than it was several years ago. In fact, recent criticism of the strategy can be traced to a basic misunderstanding of the concept. ... Many investors have become disillusioned over the last two and a half years, as their stock holdings have withered. Yet the market's recent losses fall easily within the confines of what we could have expected."

Journal of Indexes • 3rd Quarter 2002 [Aug02] The Case For Core Earnings by David Blitzer ("addresses the lack of trust in U.S. market and proposes the adoption of S&P Core Earnings standard"), Index Fund Management by Barb Piatt and David Weisenburger ("What does it take to manage an index fund?"), Seeing The Forest For The Trees by Michael Lane and Larry Swedroe ("focusing on the basics of asset allocation and low-cost tax-efficient portfolio management"), Diamonds In The Rough by Jim Novakoff ("ten keys to ETF porfolio management"), What Lies Beneath by Heather Bell ("an insiders look under the hood of index construction and maintenance").

C.I. hires Miller to run three funds [Financial Post, 02Aug02] "Bill Miller, the high-profile U.S. money manager whose claim to fame is that he's beaten the Standard & Poor's 500 stock index for 11 consecutive years", on his feat: "It's very difficult to beat the S&P 500, so the more people that get involved in the process, the less likely you are to be able to do it. To a large extent it's luck. The way the numbers have come together is a fair amount of good fortune."

The Investment Implications Of Lower Stock Return Prospects [TIAA-CREF (AAII) ] Suggestions for dealing with lower expected equity returns include save more, postpone retirement, minimize investment costs and taxes, diversify into bonds, RRBs, REITs, international equities and tilt towards value.


July 2002

The Stock Market: Beyond Risk Lies Uncertainty [St Louis Fed, Jul02] "For investors, not being able to distinguish between risk and uncertainty is hazardous to their financial health. Although we have a fairly good understanding of stock market risk, assessing stock market uncertainty is incomparably harder. Ironically, the lower the level of risk, the more aggressive are investors' bets, and the more vulnerable they are to uncertainty. Clearly, a stock market valuation as elevated as it currently is leaves much room for disappointment."

Interview: John Bogle [FoxNews, 28Jul02] "I surely think we're reaching for a market bottom. It's just about tied for the worst market decline since 1929, and that's a pretty good, serious bear market. So I think we're reaching for a bottom, if we're not there now."

Proper Perspective On The Passive Approach [Vanguard, Jul02] "The enduring advantage of indexing is lower costs ... The point of an index fund is not to beat anything. The point is to give you diversified exposure to the entire market (or a specific part of the market) and to capture an extremely high percentage of the returns of that market in a very tax-efficient fashion."

Who Really Cooks the Books? [ NY Times, 24Jul02] Warren Buffett: "The most flagrant deceptions have occurred in stock-option accounting and in assumptions about pension-fund returns. The aggregate misrepresentation in these two areas dwarfs the lies of Enron and WorldCom. ... For their shareholders' interest, and for the country's, C.E.O.'s should tell their accounting departments today to quit recording illusory pension-fund income and start recording all compensation costs. They don't need studies or new rules to do that. They just need to act."

Bylo rebuts  The problem with indexes [, Jul02] Another attempt to blame indexing for the stock market's woes. If, as the author contends, so many active managers engage in "closet indexing" in order to safeguard their jobs, then what does that say about their opinion of the superiority of indexing?

While markets have fallen dramatically over the past couple of years, low cost diversified portfolios have held up amazingly well. Using the Financial Post Indexes as a benchmark, from inception on 01Apr96, the Balanced (50%/50% fixed/equity) portfolio has returned 7.2%, Income (70%/30%) portfolio 7.7% and Growth (30%/70%) portfolio 6.6%. While that's not much more than bonds or GICs, it's a far cry from the devastating losses incurred by those who were less diversified. See also Smart Boomers haven't sold off

Beating the Odds: Active versus Passive Investing [Marriott School, BYU, Jul02] "The logic for indexing is even more persuasive if you believe the stock market is inefficient. If the stock market is inefficient and active investing is a skill-based activity, then individual investors who try to actively manage their portfolios will consistently lose to professional players with competitive advantages."

The great stock illusion [Forbes, 22Jul02] "Over long periods stocks greatly outperform bonds, right? Maybe not. A new study raises the disturbing possibility that this conclusion derives from a misreading of history."

Investors, be patient - financial doomsday is not near [Philadelphia Inquirer, 14Jul02] John Brennan offers the same advice to investors that he gave them three years ago and that he'll offer them three year's hence: "Have a plan ... Be balanced ... Be broadly diversified ... Be deliberate ... Investing isn't all that complicated. But it's hard to stick with an investment plan in tough times. Truth is, that's what it takes to succeed."

Deeper Causes [Efficient Frontier, Jul02] "Was it foolish to buy and hold stocks? Of course not. The long-term returns of most stock asset classes have been more than acceptable; it’s just that they’re joined at the hip with the certainty of serious intermittent declines. Today’s victims forgot or, more likely, were never aware of Keynes’ famous dictum that from time to time it was the duty of shareholders to suffer losses with equanimity."

Crime In The Suites [Macleans, 15Jul02] "Beyond 'WorldCon,' here are the real reasons the markets are tanking. ... Nasdaq's collapse didn't come from fraud. It came from a mania based on a series of widely promoted fallacies."

S&P launches income trust indexes [12Jul02] Three income trust indexes, to cover real estate, energy and a broad market composite, will be launched in mid-October along with an iREIT ETF from BGI Canada.

Index Rex: The Ideal Index Construction [Journal Of Indexes, 2Q02] Vanguard's indexing guru, Gus Sauter, proposes several novel ways to improve the design of stock market indexes so that they are more representative of investment styles yet minimize transaction costs and taxes.

Step over those investing potholes [Financial Post, 10Jul02] Jon Chevreau reviews Larry Swedroe's new book, Rational Investing in Irrational Times, which tells us how to avoid the costly investing mistakes that occur when we make decisions based on emotion rather than reason.

Advice from a Nobel laureate [Vanguard, 09Jul02] "What's the biggest mistake retirement savers make? Professor Sharpe: Many of us don't save enough and have our lives out of whack. To overstate, too many of us are living well now and are going to eat cat food when we retire."

Investing a matter of balance [Scott Burns, 09Jul02] "Tired and battered? Surrounded by humiliation and remorse? Want to toss in the towel? Don't. Let me put in a word for balance."

Drawing an income [, 05Jul02] "High withdrawals, volatility can deplete savings. Many retirees are at a loss for ideas when faced with having to generate the cash flow they need from their investment portfolios."

Shocked and angry: the prophet whose warnings over Wall Street were ignored [The Independent, 01Jul02] An interview with John Kenneth Galbraith, "Recessions catch what the auditors miss. ... I've been tracking this matter for a lifetime, and my greatest surprise was the sheer scale of the inadequacy of the accounting profession and some of its most prominent members."

Are markets just a roll of the dice? [Globe&Mail, 06Jul02] "There are few certainties in life or capital markets and it is this observation that guides Nassim Nicholas Taleb, a trader and writer whose recent work explores the underestimated role of chance and unlikely outcomes in the volatile world of investing. 'History teaches us that things that never happened before do happen,' Mr. Taleb writes in Fooled By Randomness"

Efficient Frontier • Summer 2002 [Jul02] In this episiode, Dr Bill (a) questions the notion that technology drives rapid economic growth, (b) shows that you can't expect old Fidos to learn new tricks, (c) sums up what we know, what we can't know and what we can reasonably debate, and (d) reflects on the tenth anniversary of the publication of the seminal Fama/French paper, The Cross-Section of Expected Stock Returns.


June 2002

A New Personal Finance [Scott Burns, 30Jun02] "What [professor Zvi] Bodie envisions, mega-trillions of the mutual fund industry not withstanding, is a future that contains a new set of financial tools designed explicitly to maximize lifetime consumption. Instead of merely reducing risk through diversification, as mutual funds do, he sees funds being replaced by structured standard of living contracts -- such as Treasury Inflation-Protected Securities (TIPS) -- and targeted accounts, such as tuition-linked certificates of deposit."

Death, Taxes, and Reversion to the Mean [Morningstar, 26Jun02] Jack Bogle speaks to Vanguard Diehards meeting in Chicago. "Where [the US stock market] goes next, nobody knows. But history and the iron rule of (reversion to the mean) strongly suggest caution, since valuations remain high today," Bogle said. "The future will depend on subsequent earnings growth. So we'd best hope American business turns its attention away from the ghastly financial manipulation of recent years—focused on hyping stock prices in the short-term—and to its traditional character—focusing on building corporate values over the long-term."

The Telltale Chart [BFMRC, 26Jun02] Jack Bogle weighs in on the debate between total stock market investing vs. "slice and dice." He contends that because of reversion-to-the-mean, simplicity wins out in the end. As for the current stock market turbulence, success in investing "will depend on your ability to realize, at the heights of ebullience and the depths of despair alike that 'This too shall pass away.'"

Why Make Your Finances Complicated? Just Simplify [Wall Street Journal, 23Jun02] [If link has expired, search Archive for "clements", then select Jun. 23] "After 15 or 20 years in the adult world, most folks' finances are a [complicated mess.] How do you stop the madness? Here are 10 ways to simplify your financial life."

Stocks Revisited: Siegel and Shiller Debate [Wharton School, Jun02] Two years after the bubble burst and a year after their last debate, "neither author conceded defeat, and each found his views supported by recent market trends."

Leading Business Group Joins Drive for Corporate Changes [NY Times, 20Jun02] "Mr. Bogle said the 'ultimate solution' to the crisis of confidence in America's corporations rests with investors. 'There are 75 financial institutions that own 44 percent of all the stock in America,' he said. 'If in concept we acted as one, we could walk in and see the chairman and tell him what we want to do. If we could just get the owners to care.'"

Indexing works better elsewhere than in Canada [Globe&Mail, 18Jun02] "Indexing works very well for exposure to U.S. stocks, and this applies even to the lamentable past 12 months. There's also a convincing argument for using index funds to invest in international markets. In Canada, the case for indexing just isn't nearly as strong. Don't misunderstand -- owning index funds that track Canadian stock indexes is worthwhile. But you have to understand the limitations and adjust your portfolio accordingly."

The Perils of Measuring Managers Against the S&P 500 [NY Times, 16Jun02] "Portfolio managers have been beating the Standard & Poor's 500-stock index in huge numbers. But their apparent good fortune has less to do with their stock-picking abilities than with how the index is calculated... When large-cap stocks dominate the market, as they did in the late 1990's, the S&P 500 becomes an artificially high hurdle over which very few can jump. When smaller stocks are leading the market, as they have in recent years, the challenge is artificially low. The reverse of this pattern is found in the small-cap stock arena. ... Overlooking these cyclical shifts generates no end of spurious conclusions."

An Index Fundamentalist Goes Back to the Drawing Board [BFMRC, 2Q02] Jack Bogle extends earlier research into the relationship between mutual fund costs and performance to include both the market bubble and its recent collapse. He concludes that costs always matter, they matter across all "style boxes", and they matter even more when performance is adjusted for "risk." Not surprisingly, he also concludes that index funds are the best way to implement a low-cost investment strategy.

Asset Allocation for Bears [IndexFunds, 12Jun02] "examine[s] how each major investment asset class might be affected by ... bearish concerns, and how investors might allocate monies to maximize returns in a bearish economy and markets."

Rebuilding Faith • Wealth Management in the New Era [BFMRC, 12Jun02] "in recent years ... faith in the stock market, faith in the corporate executives who run our publicly-held enterprises, and faith in the trustees who manage our money—have been tested. And found wanting."

What to do until the 'final capitulation' [CBS MarketWatch, 11Jun02] "When in doubt -- don't. That's right, when you're not sure about the collapsing market, the economy, your strategy, news gurus, or the advice you're getting from your broker, adviser and barber; when you really aren't sure what the hell's going on anywhere in the world -- don't do anything!"

Bond Funds, Now Up to the Minute [NY Times, 09Jun02] "Barclays Global Investors is now preparing to introduce in the United States the first exchange-traded funds that track bond indexes." While the MER and brokerage fees may be unattractive for US investors who can buy bonds directly from their Treasury, these ETFs may be a viable option for Canadians who want to own US fixed income.

Can TIPS Help Identify Long- Term Inflation Expectations? [US Fed, 4Q01]
"The yield spread between conventional and inflation indexed Treasuries contains useful information about market expectations of future inflation [but] it will always be advisable to combine yield spreads with other information to best estimate [them.]"

Revising The Couch Potato Portfolio [Scott Burns, 09Jun02] If the US bear market in large-capitalization stocks makes you nervous, then reduce -- not eliminate -- your exposure to it. "The combination of both moves -- more fixed-income, broader equity -- is likely to produce better results than the usual soothsaying."

Two books of interest to individual investors have recently been published. The Four Pillars of Investing by Efficient Frontier's Bill Bernstein is an introduction to building a portfolio using asset allocation. The four pillars are theory, history, psychology and the business side of investing. Larry Swedroe's Rational Investing in Irrational Times focuses on the psychological aspects of investing by highlighting 52 mistakes and how to avoid them. Both books are "must reads."

DFA funds hard to buy, easy to own [MSN, 04Jun02] "DFA’s brand of passive investing is not quite indexing. It eschews reliance on stock picking and market timing, which indexers also do, but it doesn’t tie itself slavishly even to its own custom-produced indices. 'The best negotiating position is not having to buy anything -- and that goes in every aspect of life,' Fama instructs. Traditional index funds are forced to buy the stocks in the index in direct proportion to their weight in the benchmark. DFA only looks at about two-thirds of the stocks in its various style universes and then 'allows weights to vary all over the place,' he says." Not available in Canada you say? Pity!

Hanging On to What You've Got Amid a Tough Investing Climate [Wall Street Journal, 02Jun02] [If link has expired, search Archive for "clements", then select Jun. 2] Costs always matter, but with market returns expected to be in single digits, controlling them becomes even more important.


May 2002

Searching for Value in the U.S. Stock Market [Federal Reserve Bank of San Francisco, 24May02] "we would not expect the P/E ratio to return to its long-run average because the bond yield and the volatility measures are now different from the past. Nevertheless, given the current earnings forecast, the model predicts a downward adjustment in stock prices. ... we obtain a forecasted total return on stocks of 7% per year--only about one-half the average compound return since 1982."

Manager Interview: Vanguard Inflation-Protected Securities Fund [Vanguard, 23May02] "I think that if you're going to own bonds—and most investors should as part of their asset allocation plan—then some portion of your bond holdings ought to be TIPS."

Dianne Nahirny, author of Stop Working Start Living: How I Retired at 36 ... Without Winning the Lottery writes a weekly column on frugal living. Spend less, save more, retire sooner.

Testing 25 Years of Passive Management [Scott Burns, 21May02] "If you want to be in the top half of the class, index. It will never get you the top return. But history shows you'll rank closer to the top than to the bottom. ... What we learn is that index investing, most of the time, will provide results that are superior to most managed investments. The operative word is 'most,' and the word people want to hear is 'best'."

Doubting the stock answers [Scott Burns, 19May02] "The current risk premium is approximately zero, and a sensible expectation for the future real return on both stocks and bonds is 2 to 4 percent, far lower than the actuarial assumptions on which most investors are basing their planning and spending."

Planning For and Thriving During Retirement [Wall Street Journal, May02] A series of three articles by Jonathan Clements, "There's Just No Rest For the Retired Investor", "Keeping the Cash Flowing in Retirement" and "Six Tough Retirement Questions To Mull Before Taking the Plunge".

Thrills, chills and market mayhem [CBS MarketWatch, 17May02] "If you're going to add just a single book on investing to your library this year, Bill Bernstein's The Four Pillars of Investing is the one. ... In Bernstein's world, attempting to beat the stock market is more dangerous than a special ops team in Tora Bora."

Is Time Running Out For The S&P 500? [Institutional Investor, 14May02] Everyone who's anyone in the world of finance weighs in on the future of the S&P 500 as the preeminent benchmark for the US stock market. Also, a concise history of modern portfolio theory and indexing.

The Association for Investment Management and Research (AIMR), at its annual meeting in Toronto honours eight investment professionals including William Fouse "for outstanding and relevant research for his conception and development of the equity index fund" and Mark Rubenstein for his paper Rational Markets: Yes or No? The Affirmative Case

The passive portfolio reaffirmed [Scott Burns, 12May02] After looking at the best-performing actively-managed US mutual funds that survived over the past 42 years Burns concludes, "a 100 percent commitment to managed-equity funds provided a lower return than the least risky passive portfolio – a 50/50 combination of S&P 500 index and five-year Treasury notes." And by indexing you don't even have to guess which managed funds will survive.

Advice on buying insurance [Toronto Star, 11May02] A new book on insurance, Insurance Logic, Risk Management Strategies For Canadians by Moshe Milevsky and Aron Gottesman, offers such useful advice as "Protect your family against the big losses, such as death, a disabling illness or a house fire. Forget insuring the little losses you can sustain, such as a cancelled trip, an appliance repair or a funeral."

Deflation the enemy of real return bond holders [Financial Post, 10May02] Contrary to the headline, deflation is not the enemy of RRBs. "Even in the unlikely event of net deflation over the 30-year holding period, your purchasing power would still be preserved."

ETF Experts Look at Tax Efficiency [IndexFunds, 08May02] Early indications are that ETFs are more tax-efficient than conventional index funds. But before reaching any conclusions, note that the sample size is small and the study period short. See also In Defense of Index Funds.

The bond that beats inflation [Financial Post, 07May02] "A hot topic for knowledgeable do-it-yourself investors is real-return bonds (RRBs), which are inflation-indexed Government of Canada bonds. ... Just as exchange-traded funds (ETFs) were relatively unknown to the average equity investor two years ago, so too are RRBs today, even among financial advisors."

Journal of Indexes [May02] "Expect a continuing array of outstanding research articles authored by indexing experts from around the world, together with debates that we hope will be heated and fruitful, and a large array of data that we trust you will find useful."

New Cause for Caution on Stocks [TIME, 06May02] A new book, Triumph of the Optimists, casts doubt on Jeremy Siegel's rosy prognosis for Stocks for the Long Run. Survivorship bias has greatly exaggerated historical returns. "Even Siegel is tempering his message. ... he sees stocks returning just 5% to 7% annually, after subtracting inflation, over the next 20 to 30 years. And an average return of only 4% over the next five to 10 years 'wouldn't surprise' him. ... Now he thinks that 75% to 80% in stocks, with the rest in high-yield bonds and tips [inflation-indexed bonds], is enough."

Forming a weekend mutuals habit [Vancouver Sun, 03May02] "A useful site for understanding the cost of investing in mutual funds with high annual management fees and for finding out about low-cost, no-load mutual funds, is"

Indexed Investing: A Prosaic Way to Beat the Average Investor [01May02] Nobel laureate Dr William Sharpe; "Should you index at least some of your portfolio? This is up to you. I only suggest that you consider the option. In the long run this boring approach can give you more time for more interesting activities such as music, art, literature, sports, and so on. And it very well may leave you with more money as well."


April 2002

"A Lot Can Happen In 25 Years" [BFMRC, 29Apr02] Jack Bogle reflects on the mutual fund industry over the past 25 years and predicts in the next 25 the most important trends will be "increasing recognition of the profoundly negative impact of financial intermediation costs on retirement plan investors [and] increased attention to asset allocation. Both trends will be accelerated by the fact that, unless I miss my guess, the financial markets will not repeat their remarkable generosity of the past quarter-century." Bogle also cautions that the transition from DB to DC pension plans is a "retirement plan time bomb."

Bylo rebuts  Rain and the markets [Macleans, 29Apr02] Investment strategist Don Coxe tries to make the case that indexing has failed investors during this bear market. Yet according to the FP Mutual Funds Review for the period ending 31Mar02, the S&P 500 returned +0.7% over 3 years, while the median US equity fund "managed" -3.0%. Some victory for active management. Meanwhile in Canada, the TSE 300 returned 7.5% over 3 years, while the median Canadian equity fund "managed" a more impressive 9.4%. So yes, most likely due to the "Nortel effect", active management beat indexing in Canada by about the same margin that indexing beat active in the US. At best, this is inconclusive. So what does Coxe conclude? "Good managers, using good weather data, should still be able to find satisfactory shelters for savings." Yup, if only pigs should fly.

Fees, Fees, Fees [Globe&Mail, 26Apr02] "Just when you think you've found them all, another one appears. And they all eat into your returns. ... Fees and commissions are often invisible unless you know where to look. Why make the effort? Often, the less you pay, the bigger your return will be. Of course, you get advice and services for those fees and commissions. If you know what you're paying, you can tell if you're receiving good value."

"The End of Mutual Fund Dominance" [BFMRC, 25Apr02] "The mathematics of the stock market—today's low dividend yield plus nominal earnings growth—suggests an investment return averaging about 6½% over the coming decade. And it seems inconceivable that the huge boost that investment returns received from the 1979 - 1999 increase in the price-earnings ratio from 7x to 30x—a speculative return of more than 7% per year!—can possibly recur. Indeed, it is reasonable to predict that p/e ratios, having added so much to previous stock returns, will now begin to subtract from them. That is, having seen the bright upside of speculative return, we are now seeing its dark downside. Reversion to the mean strikes again."

Gross, Miller Heed Bogle's Call to Speak Out [Morningstar, 25Apr02] In the wake of the Enron scandal Jack Bogle called on portfolio managers, on behalf of the shareholders they represent, to take a more active role in corporate governance. Only a few have so far. Some corporate executives are not amused.

Funds in a funk [US News, 22Apr02] "professional mutual fund managers say it is during bear markets, not bull markets like the 1990s–when a bevy of large-company stocks soared–that they can show off their stock-picking acumen. ... [yet] in the two-year bear market, the average diversified stock fund has lost more than the overall stock market. Large blue-chip stock funds fell on average 11.5 percent a year during this period, 4 percentage points worse than the S&P 500."

Universal Life: A scandal in the making? [Financial Post, 21Apr02] "UL could become the insurance industry's next 'vanishing premium' scandal...high commissions and sky-high management expense ratios (MERs) on the underlying investments make the investment side of UL of dubious merit. And even the tax advantages were questioned...UL is so complex it's not understood by 98% of the brokers and agents who sell it, let alone their clients."

Warning: Fund stats offer little help [CBS MarketWatch, 19Apr02] "There's no silver bullet in predicting the future performance of a mutual fund," says Gavin Quill, Sr. Vice President and Research Director of FRC. "This study tells investors what doesn't work in predicting the future. In the final analysis, your best strategy is still to focus on portfolio asset allocation, diversification and risk assessment, not specific funds, it's that basic."

The Risk Premium Debate [Frank Armstrong, Apr02] Investors were handsomely rewarded in the past century for investing in the stock market. The prognosis for the future is generally not quite so rosy.

if a lower return environment comes to pass, it will be even more important to control costs, reduce risks, and reduce exposure to taxes. Capturing as much as possible of the global equity market returns will assume added importance with slimmer margins for error. For almost twenty years the rising market lifted all boats – even leaky ones. But, the days when even an irrational, dysfunctional, self destructive investor could expect fat returns may be gone forever.

Expenses tarnish index fund results [Toronto Star, 17Apr02] Many Canadian index funds are so expensive as to be self-defeating. However there are many low-cost alternatives including ETFs, though you won't learn about them all by reading The Star.

Is the Equity Risk Premium Still Thriving, or a Thing of the Past? [Journal of Financial Planning, Apr02] We're unlikely to see the exceptionally high stock market returns of the past 20 years in the next 20 years. But how low should we adjust our expectations? Roger Ibbotson and Robert Arnott debate.

Pension fund expectations return to earth [Toronto Star, 09Apr02] "The latest annual report from the Ontario Teachers' Pension Plan Board provides some sobering thoughts on what might lie ahead. ... In the fund's working assumptions for the next decade, it suggests an annual average rate of return of 4.5 per cent may be difficult to achieve."

Efficient Frontier • Spring 2002 [Apr02] issue is now available. "Only two centuries of data," "When risk and return become the same," "Efficiency, rationality, and arbitrage," "Of markets, economies, and populations."

An issue of risk and return [Financial Post, 04Apr02] "Nobel laureate Sharpe tackles retirement time-bomb. The bursting of the stock market bubble two years ago provided a chilling object lesson for a whole new generation of investors: More return; more risk. ... the complex issue of risk and reward is central to how the United States, Canada and other nations will tackle the job of funding the long retirements of larger and larger segments of the population."

Diversify, Nobel winner counsels [Globe&Mail, 04Apr02] "Stock volatility and accounting problems that have battered the markets should be enough reason for investors to 'diversify, diversify, diversify,' says Nobel Prize winner William Sharpe. ... he advises investors to, among other things, buy and hold stocks for the long term and keep costs low, especially with mutual fund companies. Mr. Sharpe is a fan of index funds, which he says have lower costs and added diversification."

Latest Journal Articles And Working Papers In Finance [Research Finance, Apr02] If you're interested in keeping abreast of current academic research in finance, this link will keep you very busy.


March 2002

Adapting to the Shrinking Equity Premium in Your Life [Paula Hogan, 1Q02] An excellent introduction to the notion of equity risk premium and how it affects investors. "In sum, the world hasn’t changed, but life is moving on. And those who adapt tend to come out all right."

'Brandes Bomb' shows hazards of star mindset [National Post, 28Mar02] "Burned again! Unitholders of AGF mutual funds are the latest investors to feel betrayed by the loss of a star mutual fund manager [and] see the Brandes departure as one more reason to embrace low-cost indexing strategies which don't depend on star managers. Over the long run, research shows stars can't outperform the indices because of their own high fees. Index funds eliminate the cost of a manager and you don't suffer when he or she leaves. But in our celebrity culture, investors want to believe in personalities. The fund companies oblige, marketing their stars like any other consumer product."

Q&A with Jason Zweig [Morningstar, 26Mar02] A 5-star rated discussion with financial journalist Jason Zweig about a wide variety of investing issues.

As I've written before, indexing only works well for people who can unashamedly say, "I don't know and I don't care." You need enough emotional detachment to set up what I call a permanent autopilot portfolio; if you'll be tempted to second-guess your index funds, you're better off not buying them in the first place. To be a good index-fund investor, you must be willing to completely renounce the notion that investing is a sport, and most investors just can't do that. So, while I doubt I'll ever stop recommending index funds, I no longer want to browbeat everyone into buying them. There are just too many people whose personalities are ill-suited to this kind of investing.

Barclays seen selling U.S. fund manager [Financial Post, 26Mar02] "Barclays PLC, Britain's third-biggest bank by assets, may sell its Barclays Global Investors [ETF] fund-management unit, to return cash to shareholders or expand other businesses in Europe, investors said. ... The British bank may sell the unit to management for more than US$1-billion, The Wall Street Journal reported, citing unidentified people familiar with the situation."

Three winning portfolios for passive investors [CBS MarketWatch, 25Mar02] Three US-based advocates of simplicity in investing, Scott Burns, Bill Bernstein and Bill Schultheis, review their results over the past decade. Canadian investors who may want to follow suit should consider adding some Canadian content to these portfolios.

MERs offer best guide to funds' future peformance [Globe&Mail, 20Mar02] A study by US investment research firm Financial Research Corp. concludes that a mutual fund's MER may be the most useful predictor of its future performance. It also found that past performance may be useful in some circumstances, especially with fixed income funds. Of course this isn't news to anyone who's read John Bogle.

John Bogle and the Power of Passivity [Slate, 13Mar02] at a recent financial planning conference in New Orleans:

It seems almost un-American to believe that an unmanaged fund would be better for investors than one run by a savvy and heroic expert, but in general, very few managed funds are able to beat the indexes for very long. This is one of the things that made Vanguard, gradually, a hit: It has the power of diversification on its side. The other factor is that with a passive approach, expenses for investors are lower. Fund companies tend to make their real money, and water down your real return, by charging fees that seem small but in reality are not. Railing against fees is another one of Bogle's recurring themes—the flipside of the magic of compounding returns, as he put it this weekend, is "the tyranny of compounding costs."

Sorry, Wrong Numbers [Kiplingers, 12Mar02] "The [Dalbar] study blames market timing for investors' woeful returns...There's just one problem. The study's methodology is hopelessly flawed."

Does Indexing Affect Stock Prices? [IndexFunds, 12Mar02] And the answer is: "The evidence and the logic is that indexing does not drive prices. The advantage of indexing is based on solely on the mathematics of investing: Since someone must own all stocks, passive investors and active investors both must earn the same gross returns. And since passive investors incur lower costs, they must in aggregate earn higher net returns."

Fool Me Twice, Shame On Me [Financial Advisor, Mar02] "Many Wall Street strategists are calling the stock market "undervalued" today based largely on how far and fast it has fallen over the last two years, and the coming prospects for economic recovery. The truth is very different. The fact that stocks could have fallen so much since March 2000 and still be so expensive today is a statement about how silly we all got in 1999-2000 and about the disingenuousness or error of those who did not sound the alarm then and, with some notable exceptions, are generally not doing so now."

Patient Investing Can Turn Rags Into Riches Over Time [Wall Street Journal, 10Mar02] [If link has expired, search Archive for "clements", then select Mar. 10] "Possibly the smartest financial move you can make is to start saving as soon as you join the work force. That way, you will have a better shot at amassing riches, because your money will enjoy years and years of investment gains. ... Time is the leverage that makes sound investment decisions look brilliant and turns small mistakes into horrendous blunders."

A monkey could beat your mutual fund manager [National Post, 06Mar02] Editorial page columnist Andrew Coyne "gets" it. In investing there's nothing wrong with settling for "the average", i.e. indexing, when it gives you a 2% annual edge over the average professional -- year in and year out.

What should you do? Buy as diverse an array of stocks as you can: index funds are a cheap way to "buy the market." Then forget about them. Don't trade them. Don't follow their prices. In fact, don't even read the business section.

Forget drivel about a stock picker's market [Globe & Mail, 05Mar02] "the fund industry is largely biased against indexing because it's a competitive threat. This means you can't expect straight talk on indexing from fund companies and many financial advisers who make their living selling funds."

Coffeehouse Investor Newsletter [Coffeehouse Investor, Winter 2002] "A diversified portfolio of low cost index funds should be the obvious alternative for smart investors. ... Wall Street will spend billions of advertising dollars this year promoting its stock picking prowess, yet they ignore the one issue that has the greatest impact on your financial well-being - your ability to save more than you spend."

Mutual funds: Canada and the United States [FundAlarm, 01Mar02] "To many Americans, Canada sometimes seems like the Northern Extension of the U.S. When it comes to mutual funds, however, there are some major differences between the two countries. Here are some of the biggest"


February 2002

New Concepts For Securities Regulation [BCSC, 18Feb02] The British Columbia Securities Commission has published a concept paper and is seeking comments on regulatory reforms that would, among other things, facilitate the entry of foreign mutual funds and brokerage services into Canada.
We would consider allowing foreign mutual funds that are subject to a credible regime of regulation to offer securities in Canada using documents prepared under the foreign regime. If foreign funds were allowed access to our markets, Canadian investors would have more choice, including the potential for lower cost investment options. ... Consider allowing foreign registrants that do not solicit business from Canadians to advise or open accounts for Canadian residents to trade in foreign securities without registering here. ... Canadian residents who seek out foreign registrants would not have the protections of Canadian law, but that would be their choice. Our responsibility to protect investors in our markets does not extend to protecting them when they voluntarily and without solicitation choose to do business in foreign markets.

In a bear market costs matter more than ever [National Post, 16Feb02] "in every case, and in every category, the superior funds could have been systematically identified based solely on their lower expense ratios ... there was virtually a perfect inverse relationship between expenses and returns -- increases in expenses lead to a direct proportional 1:1 reduction in returns."

The 60/40 Solution [Bloomberg, Jan/Feb02] "Investment management provides only one dependable way to survive through the uncertainty of the future: diversification. Placing large bets on an unknown future is worse than gambling, because at least in gambling you know the odds. This is why I propose restoring 60/40 to its rightful place as the center of gravity of asset allocation for long-term investors."

Time can conjure up the profits [The Independent, 16Feb02] A study, The Triumph of the Optimists, by three British academics, concludes that while stocks may outperform in the long run, many investors may not be able to wait that long. Moreover, previous studies have overstated the case for stocks by not accounting for survivorship bias, nor for the egregious effects of frictional costs. They also find that the value premium exists.

"nearly all the gains in wealth from equity investment" are "transferred from the investor (who still bears the investment risk) to become a resource for the investment manager, professional adviser and tax-collecting authority". This they believe is unsustainable, as even the dumbest individual investors gradually wise up to the real risk-return bargain they are being offered. With equity market returns set to decline after their great run over the past 20 years, keeping costs and turnover to a minimum will remain a priority.

Big index funds, still the best bet in equities [Scott Burns, 12Feb02] "Bottom line: If you are making a primary choice, one that you will hold for a long time, funds that invest in major market indexes remain a core choice and best bet in equities."

Revamped index mirrors the times [National Post, 11Feb02] A new index, the S&P/TSE Composite, will soon replace the TSE 300. "This development has some fairly broad implications for investors, particularly in light of the estimated $50-billion or so that is indexed in Canada."

Performance of Index vs Active Portfolios A 15-year (ending 31Dec01) performance comparison between portfolios comprised of the median actively managed funds versus similarly weighted portfolios of indexes (minus an "MER" of 0.50%). Again, indexing beats active management. How does your portfolio measure up?

Money in your pocket [Canadian Business, 18Feb02] Mutual fund dealer ASL Direct offers another way to minimize costs by offering rebates on the trailer fees most fund companies pay them. Those who own mostly low-MER index funds and ETFs may not get a large enough rebate to offset the transaction and monthly account administration fees.

Commission era ending? [Investment Executive, Feb02] "In a controversial move that could work its way to Canada, Britain’s new super-regulator, the Financial Services Authority, is proposing to ban independent advisors from charging commissions, saying the charges favour advisors and hurt consumers. The FSA’s proposal, part of a massive overhaul of Britain’s financial advice industry, would require independent advisors to agree on an upfront fee with clients."

Investing in Total Markets [John Norstad] A well-reasoned paper that argues "For total-market investors, the three disciplines of history, arithmetic, and reason all say that they will succeed in the end. As John Bogle says, 'In my view, owning the market and holding it forever is the ultimate strategy for winners.'" See also Morningstar Vanguard Diehard threads 16440 and 16732.

In tough times, fees matter more [Globe & Mail, 07Feb02] When they can't deliver returns, fund industry apologists deliver excuses and obfuscation. We should be thankful the industry doesn't raise their fees as fast as they pile up the bovine scat. Kudos to Hamilton and Hallett for adding some balance.


January 2002

Paying for time [CBC, 29Jan02] "an inside look into how some TV business shows are charging companies to appear on their programs. It's called pay for play and often it allows companies to have editorial input during the filming and scripting process. Good coverage can then raise the company's stock price. It's a win-win situation for everyone - except the viewers, who are not in on the deals."

Longer time horizon "does not reduce risk" [Financial Times, 26Jan02] Finance professor Zvi Bodie, "We have millions of people investing their retirement funds in products they don't understand, and being asked to make decisions about things that even the 'experts' don't understand."

Active Fund Trading Costs Remain High [IndexFunds, 22Jan02] "Many individual investors believe that professionally managed funds have a trading cost advantage over them, but this is not the case." A Plexus Group study shows that brokerage commissions, market impact and related, non-MER costs can easily add 1% or more to the cost of managing a mutual fund.

Dump the Performance Fairy [InvestorSolutions, Jan02] "One of the chief obstacles to becoming an enlightened investor is the belief in a performance fairy. Unlike Tinker Bell, who flew around doing nice things, the Performance Fairy robs investors of their rightful gains. Actually, Performance Fairies are gremlins in disguise. By convincing unsuspecting people that it is easy to beat Mother Market, they induce investors to do all kinds of crazy things. Unfortunately, the damage that they do is far from trivial."

Rosen the gadfly of accountancy [Financial Post, 21Jan02] Canadian accounting standards are a "massive Ponzi scheme." ... "Moving from U.S. to Canadian rules can change a profit of $7 a share to a loss of $1 a share." ... "I don't invest in Canada any more. I lose too much here. I like the currency about as much as I like the accounting." ... "Your car and your condo are protected by a police force and a Criminal Code, but there's no protection for your savings. The average person's pension is at stake here. It's about time we all woke up." ... "The auditors are the ones who are driving the getaway car."

Money [Richard Akerman, Jan02] Another Canadian DIY website that's chock full of links to finance, investment and tax related websites.

2002 Asset Allocation Return and Risk Assumptions [Wilshire Assoc. (posted on IndexFunds), 15Jan02] Wilshire Associates weighs in on expected returns for many asset classes. Includes 1, 5 and 10-year rolling historical returns, risk, asset class correlations, and lots more.

Revisiting the money manager [Scott Burns, 15Jan02] In response to criticism about recent columns that told it like it is, Burns again tells it like it really is:

The most productive step any investor can take to improve his long-term returns is to reduce the cost of investing. ... There is no evidence that paying high costs leads to higher returns or greater safety. It is not certain that higher costs lead to higher service, although that is often claimed. It is certain that the high-cost investment media are trying to maintain or raise their "take" from our investments with wrap accounts and new investment packaging.

Efficient Frontier • Winter 2002 [Jan02] issue is now available. More great insights from Bill Bernstein on how to invest wisely and sleep soundly.

Why It Takes Psychology to Make People Save [NY Times, 13Jan02] A novel use of psychology and behavioural economics gets people to save more for their retirement while feeling less pain about doing it.

Ingredients to Toss Into Investing Stew [Wall Street Journal, 13Jan02] [If link has expired, search Archive for "clements", then select Jan. 13] Four simple rules for investing success. 1. Own stocks and bonds. 2. Diversify. 3. Minimize costs by indexing. 4. Stay the course.

Callan Periodic Table of Investment Returns [Callan Assoc., Jan02] is a "representation of relative asset class performance over the last 20 years. The table depicts annual returns for eight asset classes, from 1982 to 2001, ranked from best to worst. Each asset class is color-coded for easy tracking. Well-known, industry-standard market indexes are used as proxies for each asset class." [See also Callan's 1980-2000 data and CapTrust's Annual Returns for Key Market Indices (1980-2001)]

No Resolutions? Outsource Them [NY Times, 06Jan02] [Free registration required.] "When you send out the dry cleaning or order takeout food for dinner, you're outsourcing as any corporation. So why not also get your new year's resolutions from a pro? Here are mine — on investing, the workplace and the ethics of consumption."

Nine Ways to Help Get Your Finances in Shape [Wall Street Journal, 06Jan02] [If link has expired, search Archive for "clements", then select Jan. 6] Have the market declines of the past couple of years got you "down"? Pick yourself up, read this, and get back in (financial) shape.

Pensions need reform as much as health care [Financial Post, 03Jan02] Pension expert Keith Ambachtsheer sees four areas where Canada's pension plan system needs improvement:

First, we'd be expanding the range of tax-efficient opportunities for Canadians to participate in employer-pension plans or to contribute to RRSPs ... Next, we'd be creating a simplified, uniform regulatory environment for pension plans and RRSPs across Canada ... We also need to foster good fiduciary practices in the management of pension and investment funds ... High-cost funds only benefit the intermediaries, not the beneficiaries. ... Finally, we need to be promoting greater understanding by Canadians of the basic principles of personal finance, including retirement planning.

A Primer for Canadian Do-It-Yourself Investors [02Jan02] Shakespeare lives! Here's how one early-retired DIYer invests (with a little help from his Boomer friends.)


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