Completely Disillusioned With Investing

[Belguy]

Well folks, I have to tell you, with the latest correction in the markets coupled with all of the bad news out there about record government debts worldwide and the prospect of rising interest rates for some time to come, that I have become totally disillusioned with the entire investing game.

I used to take the advise of a financial advisor or, in other words, a financial services salesperson. However, after many years, I got sick of seeing everybody making money off of my money except me.

So, with the advent of ETF's, I dumped my advisor and set up a portfolio of index products through a discount brokerage account.

And so, how has that approach worked? Well, here are some examples with all figures as of May 31, 2010:

iShares LargeCap 60 ETF: 10 year return: 4.42% which is hardly better than what I would have earned with a ladder of GIC's over the same period but without the gut-wrenching volatility. The 3 year return for this ETF is negative 2.48% and so things have become worse with even more volatility.

The iShares S&P 500 ETF hasn't been around for 10 years but it's 5 year return is negative 3.06% and it's 3 year return has deteriorated to a dismal negative 11.73%!

So, how did the international markets perform? Well, the iShares International ETF has a 5 year return of negative 2.81% and a 3 year return of a downright discouraging negative 14.89%!!

OK, then how about the bond side of things. Well, the iShares CDN Broad Bond ETF (XBB) has a 5 year return of positive 4.50%. At least it's positive but, I expect, no better than how a ladder of GIC's would have performed over that period.

And now, the outlook is for interest rates to rise and for equities to struggle in the face of all of the bad news out there. If you are a young investor, with a long time horizon, it's not so critical but if you are already retired or close to retired and don't want to put your retirement savings at risk, that ladder of GIC's is looking better than ever as interest rates begin to rise again.

The only way to beat the system is to either be a lucky equity investor or one will impecable timing or one with inside information on a given stock or one with a lot of time to research each stock and then know when to buy and when to sell which is no easy feat.

I have gone on long enough here but I am wondering how many other investors or would-be investors out there share my negative view of investing in today's dismal and very uncertain market conditions.

I've about had it as my friends who invested their money in GIC's and/or real estate just keep rubbing it in to me and my thick skin is starting to wear thin as the markets take still another in a seemingly endless serious of gut-wrenching drops with no signs of improvement to the investment climate in sight--in fact, quite the opposite.

What say you??

[Michael D]

What say you??

Dividends. Growing dividends.

[NormR]

Not unexpected, see Asset Allocation for Canadians

[BRIAN5000]

What say you??

Dividends. Growing dividends.

IMHO its just about the only thing that will sell to retail investors at the moment. The latest craze or phase. This will go out of favour and something else will come along to move everyone into. High Tec, Income Trusts, ETF's, what's next?

[AltaRed]

The last decade was the lost decade for equities in general, but as has been pointed out:
- Include dividends in equity returns, i.e. Total Return
- Asset allocation

Additionally, there is nothing magic about a 10 year period. Think 20+ years and you will see a different picture. No certainty the next 10 years will replicate 2000-2010, but it could also replicate 1990-2000. Personally, I believe the next decade will be somewhere in between, and tending toward the low side. Why? Because historic economic growth primarily came at the expense of continuously reduced regulatory oversight, population growth, inadequate attention to the environment, access to inexpensive commodities, and government fiscal deficits. IMHO, none of these are sustainable.

[Matt5000]

iShares LargeCap 60 ETF: 10 year return: 4.42% which is hardly better than what I would have earned with a ladder of GIC's over the same period but without the gut-wrenching volatility. The 3 year return for this ETF is negative 2.48% and so things have become worse with even more volatility.

OK, then how about the bond side of things. Well, the iShares CDN Broad Bond ETF (XBB) has a 5 year return of positive 4.50%. At least it's positive but, I expect, no better than how a ladder of GIC's would have performed over that period.

The above largecap 60 doesn't look like you included dividends, which would give you a nice outperformance over the fixed income portion. Also 10 years is still at the shorter end of equity investing.

As far as bonds vs GIC's, they should return about the same if you're buying high quality bonds.

[Peculiar_Investor]

Just thinking out loud on the way out the door.

Could there also be some end point bias in the results? 10 years ago the tech boom bubble was still inflating. Thus the starting point for measurement was on the high side. I'd echo AltaRed's views, what is so magical about 10 years?

For me, the more fundamental question is: Has the risk premium of providing capital to business disappeared forever, or are we destined to get back to much longer term trends where taking risk by purchasing equities is rewarded?

I'm still in the accumulation phase of my investing lifetime and still believe in the long term equities will out performance fixed income, so am more heavily weighted to equities vs. fixed income (75:25). YMMV of course.

[chiaroscuro]

Jim Crammer says, you gotta stay in the game. I agree with Jim.

It is a game with rules although not the rules that you want to play by. It is like surfing. Look for the coming wave, ride, exit before it crashes on you. Repeat cycle with new wave. That is my investing strategy in a nutshell. But instead of looking for a wave I look for a gully. Oscillation is a funny thing.

[Taggart]

I'm posting the following but even though retired, I'm still mostly invested in dividend stocks.

The bad news

[couponstrip]

If you believe in mean reversion, now might be one of the best times in the past 10 years (apart from March '09 and the few weeks thereafter) to buy equity, and one of the worst to buy real estate. However, I am not one that believes free markets are predictable. Time will tell.

The best place to start (and it is never too late to start) is to read some history of the markets and a few books that discuss asset allocation (and the perils of market timing) like The Four Pillars of Investing, A Random Walk Down Wallstreet, Winning the Loser's game, Shakespeare's online primer etc. Then come up with a strategy which you commit to by writing down (also called an investment policy statement or IPS) which includes your approach to investing, your asset allocation and method of investing new money or dividends/income from your stocks/bonds. With that research, hopefully you will find enough comfort in your decisions to stick with them through thick and thin. If you find this too overwhelming to do on your own, a financial advisor can be very helpful in moving you through the steps to establish a sound investment policy. A fee only advisor removes some of the potential bias that an advisor who is paid via commissions for sales or assets under management. However, an advisor probably won't have the time to give you an historical perspective on the market that might be useful in reassuring you during times like this when we have gone through a 10 year drought. You'll be on your own for that.

Regarding your comment on luck; You have to be really quite lucky to time your buys (or sells in decumulation) effectively to add significant value to your portfolio above the average market return. The reading above illustrates this quite well.

Good luck

[Norbert Schlenker]

The above largecap 60 doesn't look like you included dividends, which would give you a nice outperformance over the fixed income portion.

The 4.42% Belguy wrote is the total return on XIU for ten years. It's been a very mediocre decade.

To Belguy I can only whisper platitudes: "It's always darkest before the dawn" and "Every cloud has a silver lining." Unless everything is going to perdition, this too shall pass.

You're overestimating the smiles of GIC investors. The ones I see are (a) pissed if not downright scared about what's happened to rates or (b) kicking themselves for missing the last year or so in equities.

There's not much you can say to your friends who have made a killing in real estate except "Congratulations on your good fortune." Sometimes it's better to be lucky than smart. Can they avoid the far side of the roller coaster though?

One final platitude: "If you're not enjoying it, quit." Nobody is forcing you to invest. Saving money and investing in nothing more than bank GICs has worked for many people over the years. It's not the road to riches but it's not the path to ulcers either. There are more important things in life than money.

[FinEcon]

What say you??

In addition to Norbert's final platitude, I would add: consider additional investment in your own earning power, i.e. increase your education. You didn't mention your age, career, etc so that may not pass the cost/benefit but it is almost always the single best ROI (in more ways than one) out there for anyone under 50. Got a four year? Suck up the short term reduction income and go to law school, get an MBA or (in useful subjects only) MSc or MA.

[kcowan]

Belguy left out a couple a facts. He is over 65, retired and totally dependent on his portfolio (no pension). So he has a need for short-term performance.

He also does not have an IPS or financial plan (unless he followed earlier advice, Belguy?).

Like other posters, I would recommend a dividend portfolio, including preferred shares and possibly some selected convertible debentures. But without his financial plan, we are all taking a stab in the dark.

I also think ETFs are unhealthy for him because he gets to see the instability of prices on a daily basis...

In his first post here, he was asking for advice about setting up individual equities to replace his ETFs. I think he would need a lot of help to do that.

[Belguy]

If a dividend on a given investment is paid quarterly, and you invest in that security on the last day of the quarter, do you still get paid the full dividend?

If the next ten years are anything like the past ten, index investors who diversify internationally, as we are often advised to do, will likely have another ten years of negative returns.

And, if you are a senior, "and then you die"!!

Not an entirely happy scenario.

[scomac]

If a dividend on a given investment is paid quarterly, and you invest in that security on the last day of the quarter, do you still get paid the full dividend?

How it works, Belguy, is that you must buy the stock before it goes ex-dividend. The trade must be settled by the record date. IOW if you buy the stock the day before the ex-dividend date and the trade settles three business days later (which usually coincides with the record date) you will receive the dividend. Unlike bond interest, the full dividend is paid to the owner of record, there is no "accrued" dividend due when dividend stocks are traded.

[Michael D]

It took me a long time to understand ex-dividend stuff until I wrote it out simply:

Buy the stock the day before the ex-dividend date.

The stock prices go up, go down, go back up. If you've chosen well, you always get your dividend; it very rarely goes down, and if well chosen they go up every year.

[adrian2]

If the next ten years are anything like the past ten, index investors who diversify internationally, as we are often advised to do, will likely have another ten years of negative returns.

I would strongly disagree with the underlined premise.

[Shakespeare]

FWIW, I'm not convinced a retiree in Canada needs to invest a large portion of his portfolio internationally. My international equity exposure is now down to 10%. International investing carries currency risks that reduce equity returns and hedging costs appear to be significant - around 1% or so.

[adrian2]

International investing carries currency risks that reduce equity returns

Risk is a two-way street, so I'd disagree with the "reduce" part.

[added later]I'd agree that if your objectives include hedging away the currency risk, it's probably not worth it.

Again, IMO, the time to hedge away the currency risk was when the C$ was about US$0.65-0.80, now I'd get rid of the hedges if anything. Similar story with the euro.

[FinEcon]

FWIW, I'm not convinced a retiree in Canada needs to invest a large portion of his portfolio internationally. My international equity exposure is now down to 10%. International investing carries currency risks that reduce equity returns and hedging costs appear to be significant - around 1% or so.

Shakes, I'll see your statement and raise you:

FWIW, I'm not convinced an investor in Canada needs to invest any portion of her portfolio internationally. My current international equity/debt exposure is 0%. That's not to say a person shouldn't hold international equity/debt, only in my view, is is not necessary to achieve solid long term returns.

[deaddog]

I used to take the advise of a financial advisor or, in other words, a financial services salesperson. However, after many years, I got sick of seeing everybody making money off of my money except me.

What say you??

That’s why they’re in business, to make money off your money. ETF’s are no different; they just make less money off your money.

And you’re right even if you lose money they make money.

The markets are not there for you to make money. The markets are there for the people that control the markets to make money.

I saw an analogy which showed the market participants sitting at a table. There was the Professional fund manager, the professional money manager, the broker, the market maker, the company and the investor.

In the center of the table was a pile of money. The pile of money came from the investor. None of the other participants puts any of their own money into the game, but they all take money out. So who loses?

If the investor quits playing all the other participants have no one to feed off. So to keep the investor in the game they have to let one or two of them win once in a while. When they do chances are you will hear about it. It’s slight of hand. Walk into a casino and you see the guy hitting a jackpot, lights flashing, bells ringing and coins dropping. What you don’t notice is all the other people dropping money into machines that aren’t paying off.

So when one of the other participants gives you advice, who will it benefit? Keeping in mind that they use your emotions to influence you, do they really have your best interest at heart?

As the investor, you think you have no control over the game, but you have the ultimate control. You decide when and how you will play. You decide how much you will lose. You can take your money off the table at any time.

When your money is in the market it’s at risk. Almost everyone agrees that market timing doesn’t work. Think about it, who is everyone and who benefits if you leave your money on the table?

“Buy and Hold. In the long run the market always goes up.” In reality this is a trend following system with no risk control. I believe it was Mark Twain the said” Buy a stock and when it goes up sell it. If it doesn’t go up, don’t buy it” Not bad advice if you add “if it goes down sell it”

When you buy a stock there are 4 things that can happen. You have a big win, you have a small win, you a have a small loss, or you have a big loss. Eliminate the big loss and you’ll be ahead of the game.

It’s your money. No one will look after it better than you.

[Shakespeare]

Risk is a two-way street, so I'd disagree with the "reduce" part.

Yes, I should have said "may reduce" or "have recently reduced". Nonetheless, some international exposure is obtained indirectly in the large Canadian multinationals.

I also think that, once retired, one should look at the portfolio yield and look to the cash flow, rather than anticipating capital gains that may or may not materialize.

Finally, for those with inadequate pensions, a small annuity may be worth purchasing at age 65 or more.

[couponstrip]

If the investor quits playing all the other participants have no one to feed off. So to keep the investor in the game they have to let one or two of them win once in a while. When they do chances are you will hear about it. It’s slight of hand. Walk into a casino and you see the guy hitting a jackpot, lights flashing, bells ringing and coins dropping. What you don’t notice is all the other people dropping money into machines that aren’t paying off.

WADR, I think the casino analogy is misplaced. The stock market is nothing like a casino. In fact, historically, it has paid out 2/3 years, and hence capital left in the market over a significant period of time would have appreciated considerably. Past returns are no guarantee of the future, but history usually rhymes. The difficulty with the market is that it doesn't pay out for two years and then lose for one year in a predictable fashion. Sometimes losing years are clustered. Sometimes, massive devaluation occurs which takes years to recover. However, I am quite confident that capital invested today and left in the market for 10 years will be much more valuable in real terms 10 years hence. I am also quite confident that capital wagered on casino games for 10 years will be much less valuable if not completely lost.

[Michael D]

WADR, I think the casino analogy is misplaced. .

the first think I thought about when reading DD's analogy was the big ads in the financial section of the paper showing 'Our fund returned 30% last year..' and all of those things. They pick out very specific sectors and time frames to amplify the opportunity of a very large gain, and then advertise it very loudly to the market.

Same as the row of slot machines. Losers are very quiet, there are lots of them. Winners are very loud and flashy, there are few of them.

From an advertising point of view, I agree with DD. But in reality the 'market' is simply a very large pool of equity designed to mitigate risk and increase chances of return with larger pools of capital. You can be in the whole market or make good choices. You can pay someone to play the market for you (MF, ETF, advisors) who get paid no matter what. Choose wisely.

[deaddog]

WADR, I think the casino analogy is misplaced. The stock market is nothing like a casino. In fact, historically, it has paid out 2/3 years, and hence capital left in the market over a significant period of time would have appreciated considerably. Past returns are no guarantee of the future, but history usually rhymes. The difficulty with the market is that it doesn't pay out for two years and then lose for one year in a predictable fashion.

If it’s predicable why not take advantage of it. Who benefits if you leave your money in the market?
If you pick your own stocks you have a risk of choosing one or two that fail. If you diversify over several your broker benefits. If you choose a managed fund the fund manager benefits. Like I said Buy and Hold is a trend following strategy with no risk control.

However, I am quite confident that capital invested today and left in the market for 10 years will be much more valuable in real terms 10 years hence.

This is a widely held belief. If I were one of the market participants that sat at the table and just took money out I certainly wouldn’t do anything to change that belief. In fact I would do everything I could to reinforce that belief. Possibly I would change the stocks in the index every so often so that the poor performers were removed and replaced by good performers. But that would be stock picking or market timing so that wouldn’t work.