Investoid

Since I bought my house we’ve had a lot of expenses/purchases made, a lot of them significant. It’s been a very busy time and as a result I haven’t been as financially disciplined as I’d like. I’ve been wasting a lot of money on food-related items, for various reasons. It’s been hard for me to take the time to make a lunch in the morning. Also, my wife and I have been doing different things at night at least three times a week, so we haven’t been together for meals and are either doing the personal meal/microwave thing or eating out. Lastly, I’ve been having a lot of meal/snack/coffee related meetings, and since I work a regular job most of these have been during suppertime.

On the house side, we had to buy furniture since our last place was furnished, and we also bought a few luxuries for the home. We’ve also been buying lots of little things for the place, some of which are replacables that will need to be added to our typical monthly expenses. All in all it’s been a pretty expensive couple of months, and I haven’t liked how we’ve been going well over our monthly budget and as a result had to dip into the cash we normally would have been saving.

To be fair, we have had a bit more extra money also coming in, from the completion of our travel business as well as through the other consulting work both of us have been doing.

Now that all the major purchases are out of the way, I need to re-institute some financial discipline. For me, it all starts out with regulating my routine. So for food, I am going to select a day and time for grocery shopping and stick to it, and also leave preparation time for lunches at the beginning of the week (I can refrigerate and freeze most of my lunch foods, or otherwise make them ready to go). I will also be trying to re-organize my meetings to fall on weekends so they can be more coffee meetings and less dinners.

We also need to re-evaluate our household expenses, see where we can save and adjust our budget to reflect our new housing.

It can be easy to go overboard financially and then get used to the excesses. But if you want to maintain a strong financial footing, you need to stop and take the time to right your habits when you notice they aren’t what you want them to be.

Over the past few weeks, I’ve decided to try and gain some expertise in short-term trading. I define short-term trading as a security holding period between 1 day and 6 months (more or less), and can include buying or shorting a stock as well as holding options on a stock or futures on a commodity or index.

I decided to get into this space for a few reasons:

• I am fully invested in my long term holdings right now, and I have found it difficult maintain interest in finding long term buys beyond periodically evaluating my current holdings.
• I currently believe that the overall market is fairly or slightly overvalued, based on the stagnant economic conditions in the US and the spectre of inflation around the globe, along with a rising interest rate environment. As a result, I am finding it hard to find stocks I think have good growth potential as well as solid dividend stocks at a reasonable yield, beyond my existing holdings.
• There are opportunities in short-term trading for profits regardless of the market cycle, and outsize returns at that.
• I believe the market is less efficient on a shorter time scale, due to the human factor involved in short-term predicitions. Thus I believe there are greater opportunities for skilled agents in short-term trades over long term investing, which reflects my long term portfolio index-oriented core.
• I am looking for a challenge, and being consistently successful in short-term trading is one of the biggest challenges that anyone can face in the finance world.

I am aware that with the large potential rewards by doing short-term trading comes with it outsize risks. Indeed, on a risk/reward basis the potential returns may not justify the chances I will be taking with my hard earned assets. Nonetheless, I am interested to see if I can apply a combination of mathematical and behavioural analysis to this space. I am planning on giving this area a lot of my investing attention over the next 6-12 months and see how I fare. I will only be taking my risk capital (10% of my portfolio) for this venture/experiment.

I am only in the early stages of my short-term trading education, and have started to read as much as possible on the subject. I am planning on picking up a couple of books that look at the behaviour of short-term traders, rather than the “Here’s how to make big bucks day/options trading” type of literature. I am also looking at some academic papers on the subject as well, and will post some thoughts on what I read. So far, I’ve come across some interesting conjectures:

• Most amateur speculators are poor predictors and get their bets wrong. Thus, if you can determine what they’re doing, do the opposite.
• Irregular options volume can be a predictor of stock performance in the near term
• Large jumps in stock prices based on news results typically overshoot the ‘true’ revaluation price, and thus will correct somewhat in the following days/weeks (my take: there’s no true value to correct to, but some profit taking occurs on large movements which swings the momentum in the other direction).

I’ve set up a personal trading journal to record my thoughts, analysis and trades that I make. As I mature in this area, I’ll start to post some of those entries here as well.

If any readers have experience in this area (good or bad), I’d like to hear what you think.

When I received my mortgage documents last week there was a credit card application included. It’s for the First National MasterCard with Worldpoints. Like many other points programs, you accumulate points on purchases made with the card and they can be redeemed on various things, such as household items or trips around the world. But this card can also do something else - pay down the principal on your mortgage.

For every $125 you spend on the card, you can pay down the principal of your mortgage by $1. So if you spend say $5000 a year on your card, then you can put $40 down toward your principal. While this may not seem like a lot, the savings in interest over time can be quite large. You can pay down the mortgage principal at any time and as many times as you want.

The catch? For one, there’s a $30 annual fee on the card, so you better be spending more than $3750 on the card each year or else the savings is a wash (just put the $30 against your mortgage). Also, if you end up carrying a balance then you’re paying interest at a higher rate than your mortgage, so you’re also not benefiting.

We’ve accumulated quite a bit of Air Miles and Aeroplan points over the past couple of years, since we typically use our credit cards for big purchases and we made a lot of purchases for our small business on the cards as well. While we probably won’t be doing as many big purchases in the future, we do pay a lot of monthly bills using automatic credit card payments (eg. for telephones, cable, gym, etc.). Since we always pay off our balance each month, this is equivalent to cash purchases.

We signed up my wife for one and will transfer as many of our automatic payments over to the card as possible. When it comes to paying down a mortgage, every little bit helps.

As a counterpoint to Cliff Mason’s post on not saving when you’re young, I came across a very good article by Laura Rowley called Earning a Degree in Financial Stability. It is an excellent read and has many good tips that will help you have a financially sound mindest from the get-go. It’s focused on college grads but I think it’s good for anyone at any age to evaluate whether they have these principles in theory and in practice.

Larry MacDonald from Canadian Business has wrote an article on “Lazy Active Portfolios”. I appreciate the mention of my article on the subject and the use of the term I coined a couple of months back. I suggest you take a look at the article, as it’s full of good information on how to construct market-beating active portfolios based on the efforts of the best in the business. He also mentions on his blog how Stockpickr is an excellent resource for evaluating US-listed companies.

I have one additional comment to Larry’s article - be aware of the quality and how up to date the information you’re gleaning from the pros is. Typically most pros are in a regulatory environment where they have to provide public updates quarterly, but for some funds and private investors, the period can be longer or even non-existent. So it’s important to know where the source of the information is coming from, be it EDGAR, news reports or elsewhere. If the information is from published public reports, determine reliable news sources that you can use to track what movements the pros are making in between reporting periods. You don’t want to be stuck with the best investment Buffet had last year.

Cliff Mason, a thestreet.com columnist (and Jim Cramer’s nephew) wrote last week about the stupidity of saving when you’re young. His long ramblings form a pretty incoherent argument (he self-admittedly got his job because of his connections), but there are a couple of interesting points within his diatribe:

• You shouldn’t save money if you have high interest student loans and the like.
• The miracles of compounding notwithstanding, the amount you’re earning on early savings (in his example, $5000) can be made up for a few years later when you are making more money than an entry-level position and will be in a greater position to save.

I would argue that by putting money towards your debts, you are in fact saving since you are reducing the future amount of interest you would pay. For me saving is all about earning a return on money you are not spending for immediate goods and services. So if your return is higher by paying down debt than it would be on an alternative risk-adjusted investment, then the choice becomes clear.

I can see the logic behind his argument about the relatively small increase in total savings from interest within the first few years. However, I don’t think the absolute return on savings is the main reason people should save early. Saving brings about financial discipline in an individual. If they learn how to save money early, then they are more likely to save money as they get older. The converse is also painfully true - you don’t have to look hard to find someone you know facing some financial difficulties. Unless there was a major disaster (loss of job, sickness, etc.), they can probably attribute some of their current issues to the fact they weren’t very good with money from a fairly early age.

I read an article on Yahoo! Finance yesterday that mentioned that nearly 60% of Americans have less than $25,000 in retirement savings (outside of pensions, etc.). How do they expect to actually retire? Most people have never thought about garnishing a portion of their wages for savings, and as a result never realized the implications of not saving enough until it is too late.

So once you’re out from under the debt heap that is student loans (or all debts whose interest is higher than what you can earn in a high-interest savings account), I think it’s important to start putting money in the bank on a periodic basis. It will set you up for financial freedom over time.

A couple of months ago Claymore announced that it would be releasing ‘fund of funds‘ ETFs. These three funds, Claymore Global Balanced Growth, Claymore Global Balanced and Claymore Global Balanced Income, are designed to provide a mixture of equities, bonds, sectors, and geographic diversification all in one product. These ETFs are still ostensibly ‘index funds’, since they track custom indices created by Sabrient Systems.

The CEO of Claymore Investments, Som Seif, was on BNN’s Market Call yesterday and indicated that these products would contain “about 13 ETFs” within them. Claymore will be marketing these products as low cost, all-in-one investment products that can make up a significant portion of your portfolio.

I think this product will attract quite a few people in the marketplace, but I would caution about its use. These funds are actively managed, and will likely be at least partially based on actively managed ETFs as well. I’ve spoke about why passively managed index funds are typically a better choice in the past. Sabrient is a quantitative shop, meaning that likely all of the asset allocation decisions will be based solely on quantitative measures. While this may be an advantage and could provide above-market returns, the added risk that such methods will work over the long term is not typically justified (or necessary to achieve one’s goals) for long-term retirement portfolios.

Secondly, all of these funds have a relatively high proportion of equity holdings, making them less desirable for individuals closer to retirement. While these funds could provide a smart and relatively cheap way for investors to create their portfolios early in their life, I would not recommend that you hold these funds once you are within 10-15 years of retirement, as the equity positions will entail a great risk to your nest egg.

Claymore has really been leading in Canada with some innovative products (along with Horizons), and it will be interesting to see if any of the other ETF providers in Canada like iShares will respond.

Earlier today I mentioned that the S&P/TSX index is not very diversified, and that it’s severely under-represents sectors such as Health Care and Utilities. I mentioned some ETFs that can provide you with some sector diversification, but they were all US-listed ETFs.

In Canada, the breadth of ETFs has been increasing quite a bit in the past few months. For some global utilities exposure, you may want to look at the Claymore S&P Global Water ETF. The fund tracks a specialized index composed of companies who sell water from the utilities standpoint, or provide equipment and related services for water-related industries. It has an MER of 0.60%, which is relatively high. The US, France and Japan are the three biggest geographic holdings.

The fund just came out on June 4, and has had a big response. As a result it is trading over 2% above its Net Asset Value (NAV), meaning that you’re paying a premium to purchase it relative to the underlying value of the shares the fund holds. Over time, this premium will likely go away and should enable investors to acquire the ETF near it’s NAV.

While you’re still exposed to global currency fluctuations with this ETF, you do not have the additional risk (and poor exchange rate spread that brokers typically give you) of having to hold a US-listed fund. This ETF does not completely cover off the utilities sector, but it is an interesting one to watch for in the coming quarter.

The Globe had a good article on how the TSX is quite overweight in financial and commodity companies over the weeknd. Because the index is a market-cap weighted index, when certain sectors or companies have strong outperformance over a long period of time, they begin to take up an ever-increasing proportion of the index.

This has major implications for the average investor using a passive index strategy. If the index is supposed to be broad market but is not really representing all the sectors adequately, you are at a higher risk than you may think. For instance, if you’re an XIU holder, over 77% of the ETF’s funds are in financials, energy and materials companies. If the any of these sectors begins to fall precipitously, then you’re more likely to experience higher losses than if you were in a more diversified fund.

I personally hold XIC instead of XIU, since it caps the maximum weight each company can take in the fund, but that does not really address the sector overweighting that the index has. So, if you’re looking to gain some exposure to sectors that have little representation in the S&P/TSX index, and at the same time beef up your international exposure, here are some options:

• Vanguard Health Care ETF (VHT) represents a mixture of medical device suppliers and pharmaceutical/biotech companies in the US. As we all know, health care is in a long-term growth cycle in the developed world due to demographics, and is one that typically provides a lot of cash flow in the US. With an MER of only 0.25%, this is an excellent low-cost way to get exposure to the health care sector.
• iShares S&P Global Utilities ETF (JXI) has a broad base of utilities stocks from around the world. While it’s expense ratio is higher (0.48%) than a similar Vanguard product, its international exposure makes it a more compelling stock to own.
• SPDR Consumer Staples (XLP) is a collection of large cap companies specializing in the consumer retail sector. Most of these companies are US based but have a strong global presence, like Proctor & Gamble, WalMart and General Mills. The ETF has a small 1% dividend and an expense ratio of 0.24%.

All of these ETFs are listed on US exchanges, which means that you’ll be facing some currency risk if you invest in them. If you have a very long term investment horizon, I believe that you will have little to worry about since we are at historically high levels for the US/Cdn exchange rate. However, if you are looking to hold these funds for a 5-10 year time horizon, you may want to discuss some currency hedging strategies with your financial advisor.

This is rather off-topic, but I needed to vent about the new that Albertans will have to perform 10 digit dialing for local calls next year. I won’t dispute the fact that we need more numbers for this province, but consider this:

1. We currently have about 3 million people living here, and up to 2 million possible numbers at the moment.
2. Assuming that we won’t go to exactly 1 number per person (including children), we need at least one more area code to handle the growth in population.
3. The last time they added an area code here (780), they split the province in two regions. Everyone north of Red Deer had to get a new area code. Thus is it technically possible to add another area code and switch over customers to the new code.
4. The new area code will be province-wide, meaning that the phone companies will have to sub-divide that code anyway to determine whether the call being made is local or not.

Why not just add 2 new area codes: one for Calgary and one for Edmonton. Switch over all customers to that code in those areas and use the additional numbers from the existing area codes for the rest of the province, keeping the same north/south split or adjusting it slightly to account for differential in population growth if necessary. Unless the cities hit 2 or 3 million (unlikely in the next 15-20 years), then based on current per-person rates and the growth in such per-capita figures, it is likely that this would solve the need for numbers for well over a decade.

I’m guessing that the solution they are using is cheaper to implement, and the CRTC just went along with their proposal without considering the merit of alternatives to the end consumer.

While most of the calls I make now are programmed ones (ie. dialed from a cell phone), I’m not looking forward to the day I have to ask for ten digit numbers when meeting someone new. It’s just another hassle. But thanks to the oligarchy that is the telecom sector, we are subject to their whims.

If you’re a Telus, Rogers or BCE investor, this is probably a good thing. They have the ability to pass along such measures with little impunity due to their stature in the marketplace. Like the banks, they enjoy special protection, although on their growth front (wireless), their protection is being threated by the possibility of new entrants getting spectrum.

Anyway, I might as well get used to the fact that I won’t be able to use the best pick-up line there is (”if I guess the first three digits of your phone number, can I get the rest?”), and prepare for ten digit dialing. (Kidding about the pick-up line, I’m happily married).