Question from a reader: risk premium, volatility and returns

JP asked me: "When investing money, we are always asked about our risk profile (low, medium or high) as an investor. Are the higher risk investment portfolios truly more volatile than low and medium? On the long run, statistically, will higher risk truly pay more? By how much? Is there data/analysis to support this?"

Excellent question. I did see a research that showed two portfolios, one high risk, one conservative and both had the same return on the long run. I can't remember where I've seen that, but the returns where around 10% which looks like the TSX average over a longer term.

The reason I don't want to dig too much into that aspect of this, is that even if in some cases, higher risks would pay more, my investing philosophy and what I want readers to get out of this blog is:

1. lower fees (ETFs, direct low fee brokers) is better
2. lower volatility is better (you sleep better at night)
3. diversification is safer (especially if you achieve diversification in less correlated investments)
   
4. trying to beat the market (indexes) is very hard
5. buy low, sellh high (obvious, but basically, buy when everything just crashed and sell when everybody is excited and buys Nortel at 120$ or buys energy stocks at a time like now)

So reducing volatility would be the first goal, regardless if you have "higher" risk or not. Personally, I diversify with "higher" risks things like gold and real estate (riskier according to some) and commodities. I've done that for a long time and it worked really well for me. Buying Nortel at its top was never part of my plan because it didn't add good diversification and it met my "sell" criteria, not my "buy" one.

A column in MarketWatch summarizes very well what I'm talking about. (I was happy to find this because otherwise I would have had no proof of my philosophy!.) Their title:

"Buying hard assets the easy way

Commodity, real estate funds boost return, reduce risk"

I hope this answers your question, although I know it might not be exactly the answer you were looking for. Feel free to comment to pursue the discussion.

Free knowledge on the Internet

• My Money Blog has an interesting article on how where to learn new languages for free. I went on the site and it looks like a legit one. It says the courses are developed by the government of the United States but I don't thin kit's operated by them. Slightly misleading, but if there is no catch then I guess it's ok :-)
  
• Since I'm on the free knowledge topic, I'm sure that you've all heard about Wikipedia, but just in case, make sure you bookmark that site to get quick info on about any subject (even often on live events as they are unfolding ).
• Always wanted to know what
  

  "tenancy by the entirety"

  meant? .Find out investment words definition on www.investorwords.com.
• Need to correct your English grammar?
• An interesting link on Canada personal finance education on ABOUT.COM.
  
• For everything you've always wanted to know: the USA Library of Congress.
• I wasn't aware of that, but you can search out of copyright books on Google Book Search. These guys are really coming with cooler stuff by the minute!
  

Penny stocks, junior mining, gambling, speculation, quick money ; yes I've done it!

I have to say right away: I am a very conservative investor who favors low fee investments. Once in a while though, I get tempted an try to make a quick buck with play money (better than going to the casino!). I have lost 300$ with Games n' Flicks (penny stock of a Netflix wannabe company). But recently, I made 1000$ from buying a uranium company, Khan Resources, with one mine in Mongolia that they're reopening (used to be operated by Russia). I used stop orders as the stock went up to secure gains. I was too careful and the stock got lower on the income trust bust day but then got high again. I could have made more but I slept better at night though. So that's why I sold my other penny stock at a loss to offset some of the capital gain with a loss. It's really a lot of fun, but I would never put my retirement in jeopardy to speculate! And I've promised myself to never borrow for such activities.

My next gamble? Probably in uranium again, although I've heard molybdenum is pretty hot right now :-)

Please do not try this at home.

your finances and HDTV: save some money and wait for SED TV?

In my case, the world of personal finance is as much about investing as making sound buying decisions (especially for high-price items, even more if they're luxury items!). When I pay a lot for luxury items, I want to make sure to get the most for my money.

I was thinking of buying a high definition TV, but so far, I've been very disappointed of the image quality for the price you pay. My good old giant tube TV does not have angle problems! As I was wondering what to do , my friend George mentioned a new technology that I might want to wait for: surface-conduction electron-emitter display. From Wikipedia:

• "a flat panel display technology that uses surface conduction electron emitters for every individual display pixel. The surface conduction electron emitter emits electrons that excite a phosphor coating on the display panel, the same basic concept found in traditional cathode ray tube (CRT) televisions. This means that SEDs can combine the slim form factor of LCDs and plasma displays with the high contrast ratios, refresh rates and overall better picture quality of CRTs. Canon also claims that SEDs consume less power than LCD displays. In October 2006, Toshiba's president announced the company plans to begin full production of 55" SED TVs in July 2007"

Not sure how much these 8th wonder of the world will sell for, but it's enticing enough to make me postpone my HDTV purchase... I've read this though (here): "If it works, the use of inkjet technology to make SED displays rather than the more expensive photolithography process used in LCD panels should help cost management."

So, save yourself some money and wait for something that will be much better in my own opinion (yes, screen burn-ins could be an issue, but I'm sure these gizmos will come equipped with screensavers!).

see these links for more info:

http://www.businessweek.com/magazine/content/05_30/b3944071.htm

http://en.wikipedia.org/wiki/Surface-conduction_electron-emitter_display

http://www.hdtvsolutions.com/sed_tvs.htm

http://entertainment.howstuffworks.com/sed-tv.htm

My encounter with the Investors Group financial planner !

As promised, here's the details of my meeting with a sales representative (SR) from Investors Group (IG). Although he called himself a financial adviser or something similar, he was a very nice person. He was trying to convince my mother-in-law to hand out all her assets to IG. I was glad to be there to filter out the marketing fluff from the real substance. First, you have to know that SR won't tell you anything concrete. He's basically an intermediate between the IG computer and the client.

I was never able to get out of SR what types of investments he would recommend nor what were his 2-3 favorite mutual funds. His answer was "the computer will decide based on multiple factors"! I've also never seen so much agility in avoiding answering questions as when I asked about no load (commission free) funds! I had to assume that IG does not recommend/sell them. You basically have yo sign the contract before you know what you've signed into!

One point that really annoyed me is that I've asked many if there was other compensation than the performance based one (performance of the client's portfolio obviously). The answer was always NO. But then, when I read the contract proposal, it was written black on white that SR could receive sales commissions and other "bribes" from mutual fund companies, etc.

Conclusion? If you don't know anybody who has a clue about investing, taxes, estate matters and you don't know anything yourself, it might be better than nothing. I would personally advice you to find a fee based Certified Financial Planner (have a look in My Links for the official CFPs website). At least you won't be caught too much in the commission based world that smells of conflict of interest...

I've also heard that IG pushes a lot for borrowing money to invest (leveraging) which is definitely not for everyone.

I want to be fair to IG though: they might be a very honest company and make very good money for their client. I just don't like their selling model.

What I'm proposing to do now instead for my mother-in-law is to open her a no-fee Etrade RRSP account. I'll suggest her investment in low cost ETFs index funds while trying to diversify as much as possible. Maybe the good old "couch potatoe" theory will do the trick. I might be tempted though to go with one or two solid low cost mutual funds with good track records like CIBC Monthly income and CHOU RRSP (which I find is a very good defensive play). This approach has worked very well for me so far. My CHOU RRSP resisted very well through the Tech Bust.

If anybody is curious, I can answer questions about my IG experience by email or on the blog.
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note: I was really glad that I was ready for this encounter, having read John Lawrence Reynolds' book, The Naked Investor which I highly recommend.

Blog reviews

Stingy Joe tells us we can get paid to surf the Internet!

The Dividend guy points us to The Street best US large cap dividend stocks.

This is too cool, My Money Blog shows us an impulsive buy calculator: how much the money you've wasted on a luxury item would have given you if invested instead.

Steadyhand gives us sound advice on the income trusts: think about the Fundamentals!

Claymore Dividends ETF ( CDZ ) - canada income trust situations

Like other people, I've bought the Claymore Dividend Achievers ETF following the recent income trust tax decision. I'm still struggling with the fact that the main holding is a tobacco company. What's your opinion on this?

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Back to the income trust subject : have you looked at Advantage Energy (AVN.UN) ? Their yield is awesome. I'm sure it's very risky, but Moneysense magazine recommended them a few years ago.
(disclaimer: this is not a recommendation to buy this stock ; I hold some myself though)

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Note: in the next few days, I'll talk to you about my encounter with an Investors Group financial advisor.

Money thoughts for the NHL hockey fans

I really like NHL hockey (especially the Ottawa Senators :-). I was wondering though if it was worth paying for the NHL multi games TV pack. What do you think? How much is it on Rogers? Is it worth the money? Should I save the money and attend a few games in person?

General Electric as a defensive stock?

I am about to buy General Electric. It's been portrayed as a safer stock since they're so big and diversified as well as operating internationally. What do you think the downside could be in a bad economy? It did go down in the recent years ...

Etrade!

Etrade has a new cash account that yields 4.15% . Not bad ... I've also ordered from them a free SecureID. They're finally improving their services!

Loblaws?

Using a contrarian approach, do we think it's time to buy Loblaws?. They're really low historically and their supply chain upgrade might pay off. What do you think?
(disclaimer: I am not advising you to buy)

How to save $134,987

How to save $134,987 in Men's Health magazine

ETF Barclay vs Wisdom Tree

The ETF head from Barclay has left to WisdomTree!

Impulsive investor

For the impulsive investor in you ...

Income trusts

Just a quick note on income trusts: the Investment Reporter newsletter is still recommending to buy some (good quality ones with predictable cash flow). I agree. You?

Sites to review ?

I'm trying to come up with a list of premium personal finance blogs to review. Please send me your ideas by email: canadianmoneyblogs@rogers.com

Funny financial videos

you want to laugh about personal finance bad habits (videos)?

Your own worst enemy!

The Canadian Capitalist talks about the investor being its own worst enemy.

The Dividend Guy has it all on Procter and Gamble.

Rob Carrick in the Globe and Mail says not to rely on your home to spit out cash!

steadyhand puts the income trusts decision in perspective with treats given to people over 65

School transit

Here's a good one about school transit fees

to blog or not to blog?

I'm still experimenting with ideas here .. will it be useful to the community to summarize financial blogs with some editorials?

IQ Test

The Dividend Guy has a dividend IQ test :-)

Canadian Capitalist

Visit the CanadianCapitalist for info on term insurance!

Getting there!

The site is about to start! Please be patient.

Meanwhile, please read my favorite column: Rob Carrick in the Globe and Mail .