Time for something positive. I thought I'd post about my biggest investment success. Chronologically it was before my biggest loser so it seems appropriate.
Sometime in the late '90s I was lamenting about the fall off in interest rates. The perfect GIC ladder that I'd built a few years before looked like it was going to produce only half the income as interest rates had dropped from 9 or 10% to around 5%. Needless to say, finance guy had a plan. It was kind of a modified Investing 101 plan as described in my earlier post.
The Plan was to include four funds; A Canadian Large Cap (mostly financials), a US Large Cap, and two Global Equity Funds. Let's call them the Fab Four. Accepting the advice of finance guy, I dutifully cashed my GICs every three months over the next two years and wound up with 40% of my perfect GIC ladder invested in the Fab Four. The Plan was simple, put the money in and then make systematic withdraws each month to replace the GIC interest. The best part of The Plan was that I could set my own monthly withdrawal. Given that the Fab Four had been steadily churning out 8 to 10% annual gains, I had no compunction with setting my withdrawals at 7.5%. This represented a 50% premium over the banks' offering of 5% for a 60 month GIC.
The Fab Four performed as expected for about two and a half years. The first six months got us to year end and low and behold the value of the Fab Four units was greater than the original investment. I toyed with upping the monthly withdrawal figuring that I may as well take all of the investment income, leaving the nest egg in place. I decided to leave well enough alone and carried on for another two years, at the end of which, I could barely contain my excitement. After monthly withdrawals at an annual rate of 7.5% the remaining Fab Four units were worth 114% of the original investment! That was at the end of 2000.
2001 will forever be in our collective memories because of the attacks of September 11. What many will not remember is that we were in a down market for pretty much the entire year preceding September 11. On September 10, the TSX was 6,890 down from 8,690 on January 2. A drop of more than 20%. The DOW fared somewhat better. On September 10 it was 9,605 down about 10% from 10,662. After 9/11 the TSX reached a low of 6,513 while the DOW dipped to 8,235.
Sometime earlier in the year the Fab Four had reached the top of the stairs and immediately piled into the elevator for a quick ride down. The value my units had dropped well below the original investment. Suddenly those GICs that I'd cashed were looking pretty good! I suspended all monthly withdrawals having made the decision to allow (hopefully) the value of the remaining units to recover to the point whereby I could extract the original investment and put the funds back into my safe, secure GIC ladder.
As if to prove the resiliency of the US market the US Large Cap Fund recovered in a few months. I was able to sell all of the units and put the full amount of my original investment in this fund back into GICs by the end of January 2002. The recovery period for the remaining three funds was going to prove to be a test of both will power and patience.
In my next post I'll tell you how I eventually recovered the balance of the original investment in the Fab Four.
Monday, May 25, 2009
Friday, May 15, 2009
Orphan Fund(s)
Several years ago finance guy came by to pick up my annual RSP contribution. After extolling the benefits of the various funds in my account for a number of years he suddenly put the new money into two totally different funds with a new fund company. Let's call it the Dynamo company. I doubt that I was aware of this when I signed the forms. You know how it is. It’s near the end of February. There’s only a few days left to make a tax deductible contribution. Don’t ask any questions. To quote Larry the cable guy, “just get 'er done”.
For the next several years I received the usual statements indicating the value of my holdings and the progress since making the original investments. By and large, things were going in the right direction, but the Dynamo funds never moved. Well, maybe a fluctuation of one-half of one percent, sometimes up, sometimes down. Interest rates were high and I was sure wondering why I was sitting with two funds that appeared dead in the water while a GIC investment would pay 8 or 9% and my principal would be guaranteed.
Every now and then I would ask finance guy about the Dynamo funds. The answer had something to do with a huge involvement in the Australian Dollar just about the time of my original investment. Just wait for the turn of the Australian Dollar and these puppies will take off!
Well, I held the Dynamo funds for something like ten years before finally rolling them into one of my stronger funds. Ten years. Zero return!
Why would a highly trained, supposedly knowledgeable finance guy be diverted from an established plan to add a couple of unknown, untested funds to a client's portfolio? How many times have I asked that question?
In retrospect, I've come to believe that my RSP investment in that particular year was placed with Dynamo because Dynamo was offering a bonus commission for that particular RSP season. Can't prove it. Will never know for certain but do believe that there had to be a reason.
Have a look at your portfolio. Do you have an orphan fund or two that just don't seem to fit into the overall plan? Maybe it's time to say goodbye.
For the next several years I received the usual statements indicating the value of my holdings and the progress since making the original investments. By and large, things were going in the right direction, but the Dynamo funds never moved. Well, maybe a fluctuation of one-half of one percent, sometimes up, sometimes down. Interest rates were high and I was sure wondering why I was sitting with two funds that appeared dead in the water while a GIC investment would pay 8 or 9% and my principal would be guaranteed.
Every now and then I would ask finance guy about the Dynamo funds. The answer had something to do with a huge involvement in the Australian Dollar just about the time of my original investment. Just wait for the turn of the Australian Dollar and these puppies will take off!
Well, I held the Dynamo funds for something like ten years before finally rolling them into one of my stronger funds. Ten years. Zero return!
Why would a highly trained, supposedly knowledgeable finance guy be diverted from an established plan to add a couple of unknown, untested funds to a client's portfolio? How many times have I asked that question?
In retrospect, I've come to believe that my RSP investment in that particular year was placed with Dynamo because Dynamo was offering a bonus commission for that particular RSP season. Can't prove it. Will never know for certain but do believe that there had to be a reason.
Have a look at your portfolio. Do you have an orphan fund or two that just don't seem to fit into the overall plan? Maybe it's time to say goodbye.
Friday, May 8, 2009
Investing 101
How many of us relied on our financial advisers for years as they practiced Investing 101 with our life savings? What is Investing 101 you ask. Well, it varies from day to day or finance guy to finance guy but basically it goes something like this;
They develop a personalized plan, especially for you...interesting thing is, that it's the same plan they've been using for everyone in the past ten years. With slight variations they highly recommend an asset allocation involving 20% Canadian equities, 20% US equities and 20% Global equities. For the final 40% they strongly suggest that half be invested in something very secure...not a guaranteed instrument, that wouldn't pay nearly enough commission, but something like a balanced fund or Blue Chip dividend fund. They then get really creative with the final 20%...emerging markets, small cap, resource fund etc.
The advice is that with this type of allocation you can never be hurt as all these markets will not go down at the same time...until 2008 that is. The trouble is, you never actually make real money with this portfolio as there is seldom more than half your money moving in the right direction...but, we Canadians thought we were doing great since the bounce after 9/11. Surely our portfolio was outperforming money markets or guarantees. Yup, it was...for a few years.
I do not intend to offer advice in this blog. I established it solely to share some insight and anecdotal research with fellow Canadians many of who have had retirement plans shattered in the past two years.
They develop a personalized plan, especially for you...interesting thing is, that it's the same plan they've been using for everyone in the past ten years. With slight variations they highly recommend an asset allocation involving 20% Canadian equities, 20% US equities and 20% Global equities. For the final 40% they strongly suggest that half be invested in something very secure...not a guaranteed instrument, that wouldn't pay nearly enough commission, but something like a balanced fund or Blue Chip dividend fund. They then get really creative with the final 20%...emerging markets, small cap, resource fund etc.
The advice is that with this type of allocation you can never be hurt as all these markets will not go down at the same time...until 2008 that is. The trouble is, you never actually make real money with this portfolio as there is seldom more than half your money moving in the right direction...but, we Canadians thought we were doing great since the bounce after 9/11. Surely our portfolio was outperforming money markets or guarantees. Yup, it was...for a few years.
I do not intend to offer advice in this blog. I established it solely to share some insight and anecdotal research with fellow Canadians many of who have had retirement plans shattered in the past two years.
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