To hedge or not to hedge? (US$ going "bankrupt"?)

A lot has been said about using currency hedged ETFs or not (for example the canadian XSP from iShares Canada which is hedged but has a higher MER than the american unhedged IVV - chosen by Canadian Capitalist).

My personal choice is to pay the extra MER which basically equates paying an insurance against currency fluctuations. Using an ETF to do that still results in much lower MERs than typical mutual funds.

Yes, currency fluctuations even out historically, but what if the situation is bad when you retire and you need the money? Worse: what if the US dollar sinks for the next 50 years? Although very unlikely, that could happen if they keep spending hundreds of billions every year on wars for example ...

Personal Finance lessons from the BMO huge money loss on derivatives trading.

Bank of Montreal has lost a lot of money with commodities derivatives trading. They've apparently tried to aggressively compensate for ordinary banking results. I'll let others judge BMO itself. My take here is to see if there are any personal finance lessons we can learn from this. Here are a few thoughts:

• Investing in individual stocks is a high risk business. BMO was portrayed as the ultimate blue chip stock. Even "safe" newsletters like Investment Reporter are always recommending BMO for increasing dividends. Using ETFs or even mutual funds protect you from the woes that can affect single stocks.
• Stick with simple approaches ... derivatives, short-selling and other more speculative tricks can easily backfire.
• Stick to your plan. BMO tried to make quick money instead of sticking to their regular conservative ways that made them a great company in the first place.
• Diversify (don't put all your eggs in the same basket!). What was BMO thinking making such huge bets on natural gas?

I personally own companies like CN that are considered conservative. But who knows what will happen to the stock if the economy goes down and they're hit by a big strike at the same time? I'm slowly moving to a pure ETF portfolio but I still hesitate to get rid of stocks that have definitely been good for my portfolio (RBC is another example of a good stock that I own).

1929 crash: good to keep in mind

I found an interesting piece in the Globe Investor Gold edition from the Contra Guys regarding what was being said by the media and the big banks as the stock market was going down before the big 1929 crash. Everybody was reassuring and saying the fundamentals were sound. It finally took until 1954 for the stock market to come back to the 1929 high.

They don't give specific advice in their article. My personal advice is too always remain cautious about the stock market (diversify, hold some bonds, buy good companies, etc.). On the other hand, I don't think there is any need to panic. The markets have been pretty resilient even through the 2001 bust. They recovered very quickly since then.

That said, there is always a part of me wondering if a 1929 crash is still possible ... if yes, is there any way to have a portfolio that would prevent major losses? I've been investing in defensive stocks since last year and I almost didn't feel the recent drop. I've also been investing in some highly speculative uranium and junior mining stocks and they've been doing incredibly great lately. But in any case, I have no confidence that I have a portfolio that could withstand a big crash. What's your take on this?

Investors Sentiment near record level (Manulife indicator)

This latest poll from Manulife shows that investors interest in the market is very close to the all time high of the mid 2000. It's very good news for the stock investors in the short term. It raises a flag though if you remember that previous high preceded the spectacular crash of the tech bubble. Contrarian investors like to point out that when everybody is over-excited about a stock or the market as a whole, it might be time to sell. Here's an excellent quote from Canadian Business:

Because when sentiment becomes extremely positive on an asset, your risk of loss increases, since almost everyone who wants to buy has already done so. Cautious investors should step aside or reduce their exposure. On the other hand, extremely negative sentiment can be the precursor to a rebound in price. People are so down on the asset that even a small piece of good news can set off a wave of buying. Thus, bargain-hunting investors search for value among despised assets. Not every one of these assets will rebound of course, but some of them will do so spectacularly.

They also suggest looking at SentimenTrader.com to get a feel of the market sentiment.

So I advocate again for going into defensive mode. Sell your stocks that have risen a lot in the last year (mining stocks for example). Dividend paying stocks would be a good place to start to build a defensive portfolio. The Dividend Guy tells you all about those.

Bottom line, there is no perfect solution in this case, but even just rebalancing your portfolio would prevent the type of excess that sunk people who had too much in stocks like Nortel and JDS Uniphase back in 2000 (when it would have been a good time to adopt a defensive posture!).