Thursday, April 30, 2009

how to purchase a bond

step one: be a millionaire.

-sadly, this step is often the most difficult. However, once you finish step one, i promise all the other steps are very easy to accomplish.
- if you can't finish step one, don't worry there are alternatives to engaging in the retail investment grade corporate bond market, which i'll discuss in a bit
- the reality is, if you go to a large financial institution or any investment group, only the high-net worth individuals have the chance to work with the senior advisors. if your investments are at the $200k-500k range, or less than a million bucks, you still likely will get stuck with an inexperienced advisor who will likely not understand how the bond market works and suggest government of canada bonds, bond mutual funds or etfs exclusively and then try to put too much money in equities (this is different depending on your age/pension context)

step two: do a thorough investigation of investment advisors.

- You need to be willing to ask friends, family and colleagues (it can be awkward talking about finance) about their investment advisor or if there is someone experienced they can recommend.
-meet with a variety of investors (at least 4) and ask them about their strategy (never get talked into opening an account right away) and ask them what they think about bonds, what their experience has been buying bonds for clients, and ask them how they interact with the bond desk
- if they tell you that the bond desk can make life difficult for them- walk away. the advisor does not know how to effectively work the retail bond market
- if they tell you that the majority of their activity is with the bond desk and that they have a solid, and ongoing relationship with the bond traders, this is a good sign they know how to consistently get you safe bonds that have an attractive yield (the historical average for investment grade corporate bonds of a 5 or 10 year maturity is 3% ABOVE the government of Canada rate. much higher or lower yield should raise your attention to a risky/bad investment)
-NEVER, NEVER, NEVER trust a young, or inexperienced advisor if you want to invest in bonds. It takes years of experience and relationship building with a Financial Institution's (BMO, TD, CIBC, BNS, RBC, etc) bond desk in order for an investment advisor to be able to effectively structure a large and diversified, laddered bond portfolio
- The reason is also simple: young advisors, and advisors with a small amount of clients need to extract more commissions and fees from that smaller pool of clients than an established advisor with a large book of clients. In order for the established advisor to make his salary, he doesn't need to depend on large commissions of any one client, unlike the advisor who is just starting out and needs to churn his small number of accounts just to make money.
- even if you are lucky enough to get a senior investment advisor, you must still be educated in the corporate bond market in order to work on an even playing field with your advisor, which requires that you complete the final step.

step three: do some studying (you will not need to have any type of expert knowledge, but you will have to become knowledgeable) i.e. build your own fund of investment knowledge.

- study the credit history of the companies you wish to invest your money with (available at
- study your personal context and what kind of investments are you comfortable with making (sometimes you only want to be half invested and leave some in GICs or a savings account, sometimes you need dividend income, not interest income, sometimes you want to be fully invested- you need to figure what is the right mix for you)
- i personally believe, and from what i read from people like Niall Ferguson, Nasim Nicholas Taleb, and countless other wise souls, YOU CANNOT PREDICT THE FUTURE. Worse, you will never be able to predict the future and it's actually in your best interest to expect that the worst outcome is the most likely.
-expect and plan for the worst in all circumstance while still being hopeful that things will be rosy.
-this attitude leads me and others (counter to the popular DIY investor strategy)to believe your personal savings should remain in investments that promise to repay your capital and that any investment in equities should not total more that 10%. This way, your claim to future performance is only what you stand to lose (10%) and you have prepared for the worst while leaving hope for the best.
- Every day you need to read the paper and follow the news related to the companies you have invested in. Their respective industries, the state of global trade, finance and output, and the level of debt of nations and corporations are all things you need to at least have a basic understanding of.
If you:

1) read the paper everyday and

2) do a little extra homework on the company you want to buy bonds in (just knowing if they have too much debt, have good assets, steady revenue, etc.) and then

3) know the credit rating of your bonds,

this is all the extra homework you will need.
a good advisor will act as a way to reconfirm what you are already expecting.
In essence, you are paying your advisor to provide you with bonds that meet or exceed your expectations.

- following the news and the credit rating of your company will allow you to determine if it's best for you to keep your bonds in short term lengths to maturity or longer term, or which type to keep long term and which type to keep short term
- a bond portfolio is fully customizable to your particular context, so you need to know where you stand.


So, you don't have a million bucks to invest? well, you can still build a rock solid bond portfolio on your own that should have a similar average yield to the millionaire portfolio, just scaled down to your particular heights.

1- register with one of the big financial institution's online discount brokerages (TD and BMO offer the best bond inventory, tools for making a laddered portfolio on your own, current credit ratings, and the best prices). But, to get the discounted fees, you usually need to have at least $100 000. if you don't have that much, you may have to pay some additional costs to keep the account open. Other discount brokers may not have the additional costs, but they are less likely to have the variety, quality and prices of the big boys (TD and BMO).

2- go to the library or book store and get either edition (the 2nd is a little more up to date) of Hank Cunningham's book "In Your Best Interest: The Ultimate Guide to the Canadian Bond Market". Most of what i say is basically repeating his strategy. he also runs a website, where he takes questions directly from people-
I have no personal connection to this man. It's simply my experience that the only book i would have needed to read (if i had no other experience, information or advice) in order to make safe investments was that one book. And i have read almost all personal investment books currently on the market. Hank is one of the most successful and most recognized 'bondies' in the business in the history of Canada and every single experienced investor and advisor i have ever talked to has talked about the exact same strategy time and again: laddered ten year portfolio of investment grade corporates and provincial bonds. If you want to know the secret of how rich people preserve their wealth and pass it on to the next generation, this is it.

3- follow the same strategy outlined before when it comes to knowing some of the basics of the companies you want to buy a bond from, the basics of your economic needs and the basics of the state of the current global economy. You simply don't need to be an expert. Most experts actually don't know about bonds and if they do, they admit that the average joe is just as capable of making the right choices for their investments if they just did the little bit of extra homework.

4- you will be the one creating your bond portfolio, not an advisor. so it's up to you to spread your money out. the simplest strategy is to put maximum 10% of your investment in each year up to ten years. That way, 10% of your money is freed up every year to reinvest. If inflation is rising, interest rates will also, likely, rise and that returned captial can be invested at the higher rates. the same process is repeated every year. Barring hyperinflation (which is a very remote but real possiblity), you have greatly reduced inflation risk to a fixed-income portfolio.

5- it's important to diversify a bond portfolio because any single issue for a company has some risk of default, or some bonds have a 'call' feature, where the company can decide to give you your money back whenever they want. This isn't a big problem if only say 1-5% of your capital is being returned, but what if you put 30% of your capital into one callable bond because you liked the yield and thought it wouldn't be called, and it's called at a time when interest rates are next to nothing (this is currently happening with some bank bonds).
for each company that i have a bond issue from, i put no more than 1-7% of my capital in that one company, as a way to avoid being overly invested in a single issuer.

6- once you have figured out the right mix of companies and the right amount of money to have invested, take some and put it into the stock market. I say this because once you have built your bond portfolio, that's it. it's finished. you can't tinker with it. the value won't fluctuate if you hold to maturity. in essence, it's a sleep-at-night portfolio. It's a boring way to make money, because it's slow and steady. Imagine the tortoise and the hare. Well, it's wonderful to be the tortoise because he's the hero of the story and he wins the race. But you are a human and you need something to keep you motivated and interested in your investments and not to forget when you have money coming due.
i put no more than 10% of my money in the stock market because i really like it when people promise to pay me back. no one in the stock market ever does that. But i still need some excitement and stock market-induced adrenaline in my life, so I put my money in canadian bank stocks (i know equity people who call these widow and orphan stocks, well these day's their downright speculative) and energy stocks (primarily as a hedge against the type of inflation triggered by rising oil and gas prices). IMO once you have protected the majority of your money, go crazy with the rest. if you want some dividend income, you should have fun on the stock market and see how you can fare. Your probably won't lose it all, but even if you lose over half through stupid investments and trades, you'll have learned the lesson without risking your life savings and you can write-off the capital losses on your tax statements.

Wednesday, April 29, 2009

no comments, no one reading

maybe i need to provide a better layout or a different name or more 'about me' content on my bio page....
i think i've provided all the information any young DIY investor will ever need to make safe informed decisions that protect their money and earn a happy, reliable rate of return.
no one seems to notice.
worse, when i comment to other investor blog spaces on the net, i am shunned as being a radical or i am completely censored and none of my insights get shared with the online community.
i'm trying to help these people.
maybe i need to try harder and i'm open to suggestions.

Tuesday, April 28, 2009

income vs. income

I recently read a blog called "eary retirement extreme"
this is the personal views and ramblings of a young person who lives in california.
i described this person as a hippy.
this person claimed that he didn't need to work more than 3 hours a week as a copy-editor because he worked for a few years before and saved all his money by never having expenses.
with all his savings he put it all in the stock market, and taking advantage of the tax breaks and his no-cost lifestyle, he feels he never has to work again.
he is now free to write his blog, work on some sort of book, he claims to be in the process of operating a 'startup' that has yet to produce anything specific. he likes to ride his bike and read books and generally not work a typical 9-5 life.

now, i don't live a typical 9-5 work life but i think that there are some people who excel with that structure as they have a large support network that allows them to maintain a personal balance of healthy diet, regular exercise and interacting with loved ones.

My point is that we have individual work context that make certain hours either easy or difficult. and if people find living a 9-5 schedual too hectic to maintain that healthy balance, they are free and in fact should try to find an alternative way to earn an income that restores that balance.

That last part, about restoring a natural balance is the key difference i have with this blogger and all ideologically blinded people whom I refer to as 'hippies'

from what i have understood, the hippy believes that much if not all of the consumerism and labour that has come to comprise and dominate our society is fundamentally flawed, ignorant to reality of humanity and unsustainable.

As a consequence, the hippy will seek not to engage in employment. Time and labour are what we exchange for money in a capitalist society (according to the 'hippy Confucius', Karl Marx). From his persepctive, the life of the hippy is of such a fine and intangible quality, that exchanging the time and labour of the hippy for employment income is a losing trade.

This hippy has used his wisdom to take advantage of the unsustainable and erratic society's economy. Because the hippy believes it is clever, it can use the basic principals of capitalism (investment and return) to his advantage. He can earn money without sacrificing his time and labour and now money has no meaning to him. he has no need for material goods and he does not need to consume.

These behaviours have the consequence of making the hippy feel as though they are very helpful to their environment. They demand less of all the bad things and they do not participate in the slave/master wage/labour economy, except on the master side.

I suppose i have no problem with earning income off an investment, that's what all of us want to do when we retire. I also don't have a problem with people who 'retire' early, even when they're in their twenties.

The problem i have is with someone who considers himself to be a source of information and insight actually just taking flawed principles of academia, investing and work, and reducing his future employable potential to such a low point that it's as if he was never employed to begin with. This person then goes on to argue that his example is one that people should model, and people thank him for showing them 'the truth about work'.

I believe so strongly that this person not only has made factual and logical errors, but is ultimately making moral errors, that i was willing to post comments on his blog about how his ideology was too rigid, was not realistic and contradicted the experience of the vast majority of the world.

Though, he initially responded on his blog with a comment about me being a banker and having my tie cut the blood to my brain and not being able to farm on my own and not understanding the value of being thrifty and being brainwashed into being a mindless consumer.

I was pleased to see that this person was willing to engage and debate my ideas on investment, and in this context employment income.

I responded with my belief that when you are young, and energetic and able-bodied, you should always do your best and work your hardest to have a professional attitude about your employment career. Even if you are able to live off only your investments, this is something you should only ever want to do for an extended period of time if your are old or injured in some way!

The reason i believe this attitude, of always wanting a good career you enjoy that can pay you well if you put the hard work in, is not only from my personal experience, but the experience of everyone i've ever known or read about who: is a)wealthy b)successful c)truly happy, fufilled and considered wise by all that know them; or any of the above.

The unforeseen benefit of having that attitude and putting in the effort is all the social connections we make through seeking a career. I believe that human beings are instinctively highly social creatures and that the more socialized a person is, the happier they are. I know the economy and family are much different for this generation than say 50 years ago, but having that ambitious attitude is not a work ethic common just to the WW2 generation in North America. that is the spirit that has driven ambitious people to create and build throughout the history of human experience worldwide. The greatest thing about our society is that young men were told (right or wrong) that they had to go and fight and die to protect that same freedom for their children and their grandchildren. They actually did just that so that we can all enjoy the same freedom and safety to pursue our ambition now.

Sadly, the wealth for society that was created through this waging of war and collective value of merit and achievement being rewarded in money, created a glut of people who were raised with too much of everything. In essence too much success too early in life. In my view, this is a phenomena of human behaviour consistent across societies across the ages. It's the rich kids, and middle class kids, who grow up never knowing the true hardship involved in creating stability in an inherently unstable world, that end up hating it the most. For they are the ones who have always been able to take it as granted. This sense of entitlement, falsely instilled in them since birth, creates a sub-culture of extremists. People who are so utterly convinced that the world that gave them everything is of such a ruddy and unsustainable nature it is best if everyone were to follow their lead, and simply walk away from everything, let the grasses and weeds retake the office buildings and live our lives as simple farmers, who have the internet.

I posted these thoughts with a perhaps more glib tone and they were posted on his website.
Yet something strange seems to have happened. I don't think this hippy enjoyed reading my notes. In fact, i'm pretty confident he hating seeing any criticism of himself or his selfish and sheltered ideology and lifestyle so much that he was willing to take down my posts. which he did.

He recently posted a blog talking about how he gets the occasional commentor who extols the 'duty of work' and 'duty to sacrifice' (i think he was referring to my comments). He comments that he considers these both protestant and collectivist ideas. Interesting point (not really)... Yet he goes off on more thought-garbage as to why not working is superior to working.

My fundamental point was not that you need to stay at your job if you hate it. you should quit your job if you look big picture and you say 'i hate this'. but you should always try to earn the most employment income you can that will still bring you satisfaction. The reason is simple: you don't know what the future will bring, what if you get sick? what if you need to be able to earn money if someone else you care about gets sick and needs money, too? You need employment because you cannot predict the future and your experience, skills and ability may be all that you have to get out of unforeseen trouble. That second last point, about trying your best, is where i'm critical of the hippy.

The hippy talks about working hard to lift weights, fix his bike, go for bike rides, write a blog, try to write a book. but all these things won't help him if he is trying to maximize employable income. the hippy is taking a passive role in his life and allowing the stock market and his ability to keep his costs at nothing to justify his 'environmentally sustainable' life.
But the hippy is investing nothing in his own productive capacity. He believes he needs only 3 hours a week of copy-editing. He is blind to the real opportunity to enhance his quality of life in the future and the quality of life of others by volunteering more often and trying to find gainful employment in alternative fields.
the fundamental point is simple: if you're young, you need to work. hard work is it's own reward. It is it's own reward because you never know what will happen in life and you never know what wonderful opportunities you could encounter when you are pursuing a career. conversely, if you never seek real employment, or do so without consistent, determined effort, you will never have the opportunity to know what opportunities you could have had....

The hippy doesn't want me to post those types of ideas or opinions, that's up to him. But it's ironic and very revealing that a hippy, who is all about his gay freedom of expression and shitty bongo music and being dirty and having ugly dreads and all that crap. he'll take down my opinions like's he's dick cheney, karl rove and big brother all rolled into a bong. just for the simple reason that i am so completely opposed philosophically to his philosophy.

that to me is the saddest form of hypocrisy (we all have some hypocrisy) but that is just so intellectually bland it makes me sad for humanity that people actually like the ideas this person is promoting. If enough people out there enjoy his stuff enough, he may even publish his unfinished book and make lots of money and have the last laugh. I remain skeptical it ever sees the light of day. I hope there are people on the internet who are able to see the underlying reality behind people's arguments (mine included)

He posted other responses to this blog post on my comments about 'hard work' and 'sacrifice', but not mine.
The link to his blog post about my comments (which he removed):
Here is a copy my response to this blog. maybe it was too harsh for the famously conservative internet blog forums.

"I'm going to suggest that there is a genetic reason why hippies are the way they are and refuse to recognize that they have lived a totally sheltered life.
But first, i'll just comment on the paradox of a subculture of upper-middle class, predominantly white, 2nd or 3rd generation westerners extolling the virtues of their choices. Then, before the facts, condemning virtually every principal, practice and value that their ancestors stood for (right or wrong) and which makes their sheltered universe possible to this day.
highlight this with the further paradox of now arguing that their lifestyle is something they must be given the freedom to choose without criticism (in fact, you think you should be praised) while they condemn people who seek a career on purpose as some sort of slave to a machine which has told them they have to do this even if they hate it.
yet many people actually like, and love, their jobs. they remain at their jobs because they have come to love their coworkers/employers and have come to be valued by their company (this doesn't always happen, but it's wrong to deny this positive symbiosis does actually happen regularly in our society to the benefit of many- think medicine and the sacrifice doctors and nurses must make- yet most love their jobs)
It makes me think you probably just lack sufficient levels of testosterone.
not because i think of you as less masculine (though you did just compare yourself to a housewife), but because i have read studies that show a correlation between men who prefer not to be aggressive when pursuing a career or some sort of material enhancement in their quality of life (lifting weights, an unpublished book full of your unrealistic ramblings, and an as yet un-started start-up don't count) and lower, naturally occurring, levels of specific forms of testosterone.

these same studies (they were reported on several major news outlets (not fox) so that's how i remember them), maybe you saw one in your scientific journals, showed that men who had higher normal levels tended to be more aggressive in pursuing a career they were interested in and seeking to 'get the most' out of their experience ie. being open to taking new opportunities as they arise.
men with higher natural levels of testosterone also took more risk, more frequently with their equity investments.
lower testosterone males tended to be methodical and slow moving in their equity investments.
the study was also done to include investment advisors and portfolio managers and it concluded that their respective testosterone levels were similarly correlated to the other test subjects. testosterone is not correlated to stock market performance, unfortunately.
what it all says to me (and i've been called a hippy and a corporate shill probably by the same person....) is that i should more than likely (not to conflate correlation and causation) give up. a hippy will likely never see the validity of a logic that is outside the domain of what they are willing to do with themselves. if they lack real ambition to have material improvement in their life, it's not so much a debate about the right choices to make, it's just the obvious choices that we are always predisposed to making.

I was born and raised orthodox (much different than protestant) and my parents were refugees fleeing communist Albanians. i suppose that's where i get the idea of sacrifice from (though my family (of remote farmers) fled so they wouldn't be forced to sacrifice to the state...). But my parents could have been happy when they came to the west, living off welfare, working only for the bare necessities and making sure i got to go to school on government aid and i could have just grown lettuce in the back yard while lifting weights.
we wanted more for ourselves because this place, Canada or America, provided countless opportunities we never had before, provided we were willing to work for them. Now, this is not an advertising pitch called the American Dream. it's something people with ambition have called drive.
you give the example of a hunter/gatherer society. they don't need to work once they have their food and shelter because that's all they need. while this is true, life in a state of nature is short, hard and brutish. the average lifespan is 35. why would any high-functioning adult spend his entire productive life, knowing there were simple things that could be substantially improved (medicine, literacy,) choose instead to just hunt and fish forever? its because trying to actually improve things, and not being a total dick about it, is a full-time job that takes empathy, commitment and sacrifice. The idea that you, more than some other westerner, are somehow more in touch with reality or nature is a total lie and you are spreading a false doctrine that is infiltrating the minds of susceptible youth who could otherwise be doing something worthwhile for their community.
if you really wanted to make the world better and feel responsible for that in some way, end this blog and volunteer at a hospital, soup kitchen, elderly residence or street kid centre. I'm sure those people would get much more entertainment value out of your ideas than the value anyone else gets.

traineeinvestor makes a good point."

Thursday, April 23, 2009

Nassim Nicholas Taleb david hume and your portfolio

I suppose it's my fault for just listening to the lecture.
but i looked at the bio for Prof. Taleb, and it's quite fascinating.
With an MBA, he worked as a floor trader and senior trader at some of the biggest trading houses on Wall Street. During the course of his career, he earned a Phd. from the university of Paris.
What Taleb was concerned with was no esoteric formulas about the market, or how to hedge properly (though he did write a book called Dynamic Hedging). taleb is interested in one thing and one thing only: chance.

Not probability of an event, but the impact of the event will have on probability. He is much more capable of describing chance than I am. But I visualize it in this way:

For an investor, or trader or anyone in business or anyone trying to predict the future in any shape or form.

When you try to make a bet about the future, when you try to make a prediction based on passed observations, you are using a theory.

theory is very limited in it's use. why? because of chance. because of the fact that when it comes to social, cultural, political events, natural disasters, wars- we simply cannot predict when these things will happen.

these events that take place in the world really do have consequences for society. The market meltdown we have all just witnessed is the perfect example.

the vast majority of people put their faith in investment advisors, mutual funds and money managers, who had in turn put their faith in financial institutions that hand in turn put their faith in excessive borrowing and putting borrowed money into bad investments.

The danger is that when a cataclysmic event, like the credit crisis, hits, human beings are genetically and biosocially predisposed to reconstructing our original predictions and forecasts in the presence of new observations.
do people actually do this? well there is lots of clinical data to support the fact that when an individual or groups of individuals make predictions, observe the data, and then later reflect abou their predictions. it doesn't matter how wrong their predictions were from the observation. Clinical studies show people reconstruct their past beliefs to fit with the current reality. I know I'm guilty of shaping how I see many of my past experiences differently at different points in my life.

the point of saying all this highlights the fact that economic modelers, economic forecasters, people who take data from a year or the past century or whatever, and then try to use excel or some other fancy mathematics to extrapolate the past data into a model of what to expect are NO BETTER THAN ASTROLOGERS. This goes for the majority of investment advisors, money managers and do-it-yourself amateur investors. All of these people who use increasingly elaborate mathematical economic theory to predict what will happen in the market place lost a great deal of money over the past 6 months. So has every single person who followed the 'belief system' of the world that existed before october of 2008.

Before october 08 every single investor believed that equities were always on a one way ride up. There could never be a credit freeze again (we were too smart, regulators were too well-informed) and we just kept getting better at everything, winning in Iraq.

It made it easy to deal with paying 3x the amount for oil and natural gas than the year previous.
people didn't think about the long-term consequences of a massive and rapid run-up of energy prices. They didn't think about it because the last time it happened the stock market wasn't wiped out by half.

The Black Swan is not just a book, it is an ancient philosophical problem. Put in contemporary terms, it was a common phrase like 'when pigs fly' to say that something was as likely as a black swan. Well, this phrase was used before the British had discovered Australia, where they did indeed find black swans. David Hume called his the problem of induction. when we create a theory or law, based on repeated observations. The essential question proposed by Hume was: what is the real law or guarantee that just because i have observed the sun rising and setting every day of my life and for those who have ever lived they say the same thing. What hard and fast law says that it must rise tomorrow or that it must always rise every day? From a strictly philosophical point of view, he is correct. the problem of induction is one that philosophers have never answered and never posed seriously because it essentially undermines the entire academic world. the problem of induction says that we can essentially predict nothing. we can have no absolute rules for our world in any domain and therefore the world as we observe it is completely unknowable. it's not even just unpredictable or chaotic, it's unknowable.

Now, that logical conclusion is what led many great philosophers, who tried to tackle the problem of induction head-on, to become deeply religious men.

personally, i take a bit of a positivist attitude. There are real observations that we can make and there are limited theories and predictable measures of behavior across a large number of domains.

Taleb refers to two domains of knowledge and existence: mediocristan and extremistan.
mediocristan is all the stuff we learn in schools but is of no practical value
extremistan is like how the real world works, where only a handful of people control most of the wealth in the world and evey body else has only a smaller average.

mediocristan is the domain where if you get enough numbers and do enough calculations you should be able to do accurate models and predictions. This is the domain of dentists, where even the best dentist in the world, his income doesn't differ that wildly from the average dentist income.

extremistan is where warren buffet and george soros and a few other guys control half of Wall street and hundreds of billions of dollars and the millions of the rest of the investment world is trading in a few thousand bucks here and there.

the point about the difference between mediocristan and extremistan: we like to believe the world is like mediocristan (and in many aspects of our life it is that way) but we generally ignore and limit our understanding of the domain of extremistan.
we prefer, through listening to anyalysts and forecasters and gurus, to ignore the fact that extremistan is a real domain of life and it has very harsh realities. the realities that only a few dominate the average and that it is totally unpredictable as to who will be the dominant in extremeistan.
there is no financial model to predit the success and value of a google.
there was no financial model (outside of a few astute observers) for the recent financial meltdown, untill after the fact.
further evidence to the idea that extremistan (which is primarily the domain of economics and finace) is totally unpredictable, for even the most dominant, is Warren Buffet. he spent a princely sum of money on a giant oil company just before the giant crash in oil. maybe he did this on purpose, but that's unlikely in any scenario.

the lesson for your investments: if you think stocks and trading in other forms of equity-based investments are a safe place for the majority (or even bigger than 10%) of your savings, if you have been given this advice from an advisor or read it from an investment guru, it is the same as if you had taken the advice from an astrologer.
the data, as discussed by Taleb, shows that when it comes to economic forecasts and predicting what the market will do, human beings simply fail time and time again. Life and finance are too complicated to ever be able to know if or when the financial black swan will arrive.

therefore, look at my previous post and start to think about what's really in your best interest.
extremistan and the fact that i can't know anything about the future and that's the one thing i can know about it, makes one prone to the ultra-conservative with investments. prepare for the worst in all circumstances and take some money and go nuts with it.

Tuesday, April 21, 2009

the future ain't what it used to be

This professor, author of the book The Black Swan, gives an hour lecture that explains everything about why we should never take advice from people wearing a suit and tie. Basically, we are being hypocrites when we are skeptical of our religious experts (the pope, bishops, ministers) aka athiests, and yet we trust in the stock market.

i found the entire lecture fascinating and insightful. He is a colleague of Nial Ferguson, author of The Ascent of Money, and offers great ideas about history, society, science, philosophy, everything.

for all those amateur investors, pay close attention to the section around the 1 hour 11 minute mark. He is asked if he buys stock, ever. His answer is that if you look at the investment data objectively, if you construct your portfolio as the average guy trying to save his income for retirement you need to rethink moderate risk.

- Take the vast majority of your savings and put them into investments that have zero risk to losing the principal.
- take a small percentage and expose it to securities that give you the maximum exposure to risk.
- a ratio of 93% in investments guaranteed to return your principal, 7% of the riskiest investments you are interested in. this represents a truly and objectively diversified and moderate exposure to risk.

- if you lose all of your riskiest investments (where your capital is not guaranteed to be returned) you still have only lost 7% of your net-worth, in what could only be described as a worst case scenario
- if a best case scenario results and you double or triple your 7% investment, you have still been able to capitalize on a high risk gamble while still risking minimal capital.

- every source of prediction (especially from finance, investing, analysts and forecasters) are based on fundamentally flawed data:

our understanding of the past is warped retrospectively (ex. the belief that WW1 was predictable and inevitable) and hence not useful in reliable predictions of the future, which simply do not exist and have never existed. predicting the future is for over-sized egos, outright thieves and messianic lunatics.

Sunday, April 19, 2009

buy and die

this is an interesting story about a dichotomy for the average investor. Do i buy an investment and keep it forever, or do i try to pick a time to take my profits and find something else?

this applies to all asset classes, stocks, bonds, mutual funds, GICs, real estate.....

What i like to do, as a reader, is probe deeply in this article. to see the hidden context behind this article and so many others like it.
manipulation. Though it is the deliberate attempt of no author, editor or publisher to undermine you and your confidence, this is exactly what happens when we begin to follow the advice published in the easiest places to find advice.

The problem lies not necessarily with the media, the editors, producers and researchers, though they have an important role to play. The problem lies with the interview subjects and how they are approached. These are people who are asked to give insight into an educational exposition on personal finance.
So the newspaper decides to interview the head of this or that mutual fund, this or that 'investment strategist'.
This seems like a logical thing to do. However this is where the newspaper becomes lazy and the interview subject becomes deceptive.

The newspaper has taken on an act of complicity by publishing an article, or opinion piece, and supposedly backed it up with the informed opinions of these interview subjects, whose credentials are given.
The problem is that not only are we given no insight into their past or present performance as experts in their respective fields, we are given ZERO context that these observations could pose a clear conflict of interest. They go off to their client and say "look, you don't need to believe me, I'm in the paper talking about how you need to sell the bank stock you inherited because clearly the evidence shows buy-and-hold is dead, and even the paper says I'm the authority"

This is just one average, and not particularly thrilling example from one average, and not particularly thrilling article.

But my wider point remains that the majority of 'education' on the field of personal finance and investing is largely miseducation. the analysis and breakdown of market activity is one of the worse forms of pseudo-science alongside with creationism. Taken in aggregate, it leads uneducated investors down a path of personal insecurity where questioning the reasoning, and motives of an investment advisor, strategist, or guru, is heresy and only ever allowed in hindsight- when half your money has already evaporated. In this situation the little guy is asked to sacrifice his savings and investments to the will of the strategist and the market.

Now that i think about it, investment strategists and creationists share quite a lot in common. Much like God, with all the power in His hands, could create the world and a beautiful garden within which Adam and Eve could freely spend their years. In our example, the forbidden fruit wouldn't be an apple, but acting in your best interest... or knowledge, i guess (i guess financial gurus have more in common with God than i thought). 'Investment strategists' believe that if an investment advisor is given all-powerful control over your financial universe they know how to create a garden of Eden of finance. If you are humble, and never question your mighty investment advisor and never seek the forbidden fruit of knowledge, then you can run around naked all you like, i suppose. Most likely, you and Eve will get foreclosed and evicted before the cable gets cut off.

Saturday, April 18, 2009


To say I am a bond person.
I'm not trying to say i believe in only one type of investment and despise all other types of investment as decorated ponzi schemes.
a bond person has a different attitude toward money and a different theory about how to invest money.
a bond person focuses on relationships. The relationship with the investment advisor. The investment advisor's relationship with his bond desk. The bond desk's relationship with the Financial Institution. I look at the investment advisor's relationship with other clients and other advisors.
I study all these relationships because their nature will determine the choices that are made available to me when i am considering where to invest my money.
If all of these previously mentioned relationships are constructive, open and clear, than i can be confident i will invest my money in something considered 'investment grade' at an attractive yield and will have the highest priority in the corporate structure (only below pensioners) when it comes to having my distribution paid in full and receiving all of my money back on the maturity date.

That last point, receiving all of my money back on the maturity date. That is such a wonderful feeling. Knowing that I let an investment-grade company borrow my money, they paid me better interest than any bank GIC, and they paid every single penny back by the date they said they would. I truly believe investors have lost sight of this empowering aspect of fixed-income investing.

Rather than looking forward to the repayment of capital, it is seen as a burden. Having to choose a new investment vehicle that was capable of earning as generous a return might be impossible.
This has been the attitude sold to the small investor. The sense of urgency, the additional pressure of 'missing' some opportunity. and the famous 'buy and hold' strategy that liberates you from ever having your capital being returned to you (unless you hold for long enough that your distributions eventually exceed your total original investment sum).

my point is, everyone has a context which makes certain investment products appealing and others unappealing. There is nothing intrinsically right or wrong, good or bad about stocks, mutual funds, hedge funds. They serve a valid purpose for those who are interested. This doesn't change the fact that virtually all Canadians who look to save and invest their money participate in the fixed-income market. But i admit it's also fair to say just as many use the equity market for largely the same reasons.

Ultimately, this leads me to an observation: Small investors expend a great deal of energy trying to determine the appropriate price of a stock and are willing to use great energy to discover and devise principals, formulas, methods and strategies that attempt to consistently provide advantageous 'stock picks' that yield annual returns well about market averages.
History has unfortunately shown that when markets everywhere drop, no one is safe.

My experience shows me, that with a concentrated effort on understanding the Canadian bond market, and building a positive, informed relationship with your advisor- making sure they work with a large, reputable financial institution; You can avoid dealing with large investments in mutual funds, index funds or equities, and still earn a stable and in no way 'locked in' average cash return of approximately 5%. A laddered portfolio provides the opportunity of having appoximately 5% of your invested principal coming due roughly every 6 months. This allows you several regular opportunities to find bonds that are still considered investment grade but offer attractive yields of 7-9%. A good advisor, who understands your interest in corporate bonds will help you find these bonds when they're available. But you have to ask about the turnover in inventory. The bond desk is like a supermarket and if you want something specific the best way to get it is to ask.

this is not to say i hate buying common shares. I simply view all its actions, up or down, to be part of the highly volatile nature of the stock market.

I have expressed that i feel the stock market is run by big boys (sovereign wealth funds, mutual funds, pension funds, hedge funds, insurance companies) that control billions of dollars in trades on a day by day basis.

WEll, the exact same is true of the fixed income market. the vast majority of trades are run by the big boys of government institutions, pensions funds, insurance companies, etc. the crucial difference is that your investments in the fixed income market at least have a promise to repay 100% of your capital by a specific date.

If you put a lot of your money in picking stocks and mutual funds, your money is eventually always in someone else's hands. Worse still, no advisor ever advises to sell. If it's down, it's not a loss because it's only a loss if you realize it. So don't ever sell it. If it's up, great let the magic of compounding work for you. So don't ever sell it.

The little guy trades either stocks or bonds in the wake of the big guys. If this is reality, i'd rather take the option that offers a guarantee to pay back my principal.

this is just my views on stocks vs. bonds. i'm open to what other people think.

Friday, April 17, 2009


I realize no one reads my blog.
why would they? I'm an invisible person, as far as society is concerned.
but what i have is not quantifiable at any level. This has been my personal context my entire life, why should it be different on the net?
What has changed is my understanding of financial reality. My ability to comprehend savings and investment has been altered and accelerated through real world experience and relying on the sound advice of those with their own experience.
I am willing to share my knowledge of what I think you should do with your investments based on what i do with mine.
I believe no logical person is willing to freely give up their capital when it is not necessary.
I believe it is not necessary to sacrifice the full repayment of your capital to attain a real cash yield of 5% after tax.
I believe it is greedy, and involves taking on excessive risk for the non-millionaire, to expect annual yields to vary dramatically from a 5% average.
I believe it is necessary to pay attention to historical context.
For this last reason, I have been willing to purchase common equity in Canadian bank stocks. I have argued for the soundness of this investment, this week specifically, in another blog that more people read. I believe this 'money gardener' has been too concerned with 'playing a game' with his non-registered portfolio and i offer my comments and opinion on his blog.

maybe there is a reason to everything in the universe and someone reads my blog and has the onions to post a comment. I'm also open to the idea that all of my decisions and opinions could be my ultimate downfall in only a few years. I'm mostly looking to exchange ideas, that's what freedom and the freedom of information is about. These forums are worth their electronic weight in gold. And i have no idea what that means, but it's hella true.

diversification is dead. Farmer and French are Frauds

I like to shop around for advisors. mostly just to keep my advisor on his toes, but also to explore alternative investment strategies and to keep my mind open to new possibilities I might not otherwise have been aware of.

I met with one advisor who seemed to have a fail-proof system. He said he didn't believe in directly investing in the stock market. He argued that when you go to a large financial firm, they give you a list of the dominant companies in the Canadian economy. By owning a firm in the form of common equity, you are essentially taking on all the risks of that company. The same being true for every different holding in an equity portfolio, the actual risks of losing capital is higher than the investor is really aware of.

On the face of it, the logic is clear and the argument is fairly convincing. If i am not qualified to run the business i am defacto part-owner of, I am abdicating my responsibilities to properly manage this company in my role as part-owner, because I only want to invest my money and earn income. In this scenario, the only work the investor is interested in is ascertaining the likelihood of earning money with their investment. Without factoring in the passive role as share holder, leaving the operation of the actual business to other people, there is technically a hidden additional risk to directly purchasing common shares.

his pitch then went on.
Seeing as inflation makes canada savings bonds only a place to store money, lacking the ability to 'grow' money, they are only to be used as a strict way to hold cash for a better opportunity to buy into equities. (this had me puzzled, as he just told me the hidden risk of equities)
No, not equities in any traditional sense. What the advisor was offering was a NEW WAY TO BUY STOCKS! This was a model created by two Harvard economists, that won the Noble Prize in economics.... about 15 years ago.

These genius economists, worked very hard and did the best job ever by any economists to look at what types of stocks go up in price more than other stocks.

(I had to stop there, this was ground-breaking stuff!- No it wasn't and i was just letting him go on hoping it would be short)

So what these two, very hard working, very bright economists did is publish a paper. a wonderful paper. It has a graph, and a spiral thingy. And the best part about this paper and it's graphy and spiral thingy, is that it tells you which stocks to buy so you can make more money than everybody else.

He went on. It wasn't going to be short.

you see, individual money managers may perform well in one year, but it's very difficult for them do so for 2,3,4 or 5 years in a row. Only if you could use academic data for knowing which stocks were good and which stocks were bad, you wouldn't need to rely on those old mutual funds and their archaic way of letting one guy pick all the stocks the fund holds.

Well, these bright, wonderful, Nobel prize-winning economists did develop a formula to buy stocks that will always out-perform the market. They called it the value-growth and asset-value growth system. It's increadible. Here's how it works:

1) you put 75% of all your money in 3 mutual funds right away.
2) you put the other 25% in a long-term canada saving's bond (on the basis that you could sell it if you really need the cash)
3)pay the advisor only .75% of all your assets every year, regardless if you make a positive return of not
4)sorry, forgot to mention, the mutual funds have an additional fee of .75% of all your assets
5)the mutual funds don't let you recieve a distribution, so if you need cash just sell your bond or get a job.

So now the funds go to work, they systematically only choose companies that have a lot of assets, but the stock price is lower than that reflects. They look at small emerging companies and find the ones that have the potential to grow into really big companies.

Wow, what a novel technique. What a revolutionary strategy. It reminds me of a famous Inuit saying about the baby seal skin trade with the Hudson Bay Company. Something like "buy low... sell high". In fact, maybe that mutual fund should see if they can copyright that phrase and maybe a baby seal logo.

This has attempted to be a sarcastic blog.

That advisor, or salesman, showed a chart of what accounts for 'growth' in an equtiy portfolio. he said the evidence shows that 'diversification' is what is responsible for 90% of the growth in any portfolio. If you think about this carefully, it is a hollow description.

My point is, the mutual fund I was being sold was supposed to be the 'next generation of diversification' literally thousands of stocks from all over the globe to be held and traded 24/7, based on some computations from 1996.

The fundamental flaw: all of his charts only went to 2005. I sat down with this salesman in 2009. Why didn't he have more recent data? all of the 1996-2005 data showed the fund consistently beat the average mutual fund by 2-5% every year.

After I met with this salesman, i went to the website of the mutual fund. EVERY SINGLE FUND LOST 60-70% during the past year. Since 1997, the average return of all the different funds was only 3%. that amounts to .25% growth a year. The salesman didn't mention that. He didn't mention that while analysts are in general consensus that small cap growth and asset value companies can routinely outperform general market indexes, they are also much more vulnerable to dramatic and lasting downturns, bankruptcy and buy outs.

He called me later on, hoping i would still open an account. I told him i'm sticking with my bonds. He warned me against inflation. I laughed. Not with a properly laddered investment-grade portfolio. I'm too educated to fall for the sales pitch now. I hope everyone else is as lucky.

Wednesday, April 15, 2009

Insider Information

The truth is that stocks are part of wealth management. When you have a High-Net Worth, you often earn at least $100000 a year in interest if you simply put your money in a canada savings bond or left it in a variety of no-fee savings accounts. even if all you bought were conservative GIC's and you were earning the most conservative yield on your savings, you would likely be in the highest tax bracket. 40% of all your interest income would be taxed.

This is not good. What is good, is investing a large portion in investments that put your money into something that the government considers as putting your capital to work in the economy (and hence won't tax you nearly as heavily).

But that is not enough of an argument when it comes to investing the wealth of an individual. What about preserving the captial that you put to work in the economy? The argument is made, since the dawn of the investment advisor, you need an experienced professional investment guru who spends all day studying businesses, the economic trends, cycles, blah blah blah. You pay someone a fee to pick companies that will not lose all your capital and they offer you the chance, based on other peoples experience, to 'grow' your captial. Your capital is preserved when the share price does not lower from your buying price and rises over time above inflation.

Is that logic enough, to justify a millionaire putting half of his money (regardless of age) into the stock market? This is the general recommendation spread throughout our society. He will pay relatively little taxes. He will pay a fee to an advisor or portfolio manager who will claim to have the experience and ability necessary to pick investments that will preserve his capital.

If you believe in your advisor, if you believe in your portfolio manager or mutual fund(s), than you will likely follow their advice and immediately put half your money "to work" in the marketplace and probably put the rest in a long-term canada savings bond.

If the economy is stable and growing, the stock market does well and the stocks do well. If inflation skyrockets, the stock market usually skyrockets. Does that mean the overall return to the millionaire will skyrocket?

while it is likely that a managed or mutual fund portfolio will often report annual returns of 10%, 15% even up to 25%, this number skyrockets lower when talking strictly realized returns in cash in the hands of the investor. consider that mutual funds have low, if any, distributions. The management fee is anywhere from 1-3%, there may be hidden fees when returns exceed expectations and there are almost always penalties and hidden fees when you try to take your money out of the mutual fund.

consider also, that longer-term savings bonds are subject to much greater price, interest rate, and inflation risks. If you or your advisor doesn't understand how to properly construct a laddered portfolio (even if just in canada savings bonds) than you risk either having all your money invested in a bond when interest rates for new issues rise (if you want to cash in and buy the higher yielding bond, you are forced to sell your bond at a loss) or risk having all your principal come due when interest rates are crashing (like now).

BUY AN INDEX FUND! it does all the same work of a mutual fund, tracking the various sectors of the equities (and fixed income) markets with only a fraction of the fees. the shares of an index fund do fluctuate, so your captial is still no more protected than if you chose the companies inside the index fund yourself. Index fund, Mutual Fund, it doesn't matter. Any type of equity always carries the risk of reducing your invested capital to zero.

This should be old news. I know for some people they simply never think about these things. Reality is that at some point in your life you will have to make at least one decision about investing money. If you don't have someone knowledgeable acting on your behalf you need to be informed. better to be smart when you don't have to be stupid. Saving money is instrinsically about preserving captial and the idea of earning a return on your capital is what prospective investments are offering you in return for your capital. Invesment advisors and financial institutions, the powers that be, they have used marketing and sales to convince an entire generation that the stock market is the ideal retirement income generation and capital preservation vehicle.
How is that working out for everyone who bought into it? This strategy placed the primary goal of captial preservation into a secondary status behind income generation. Due to the favourable tax status of equities, invesment advisors were able to claim the ability to out perform a bond portfolio. After the market crash, this just simply is no longer the reality. The average investor is down anywhere from 25%-50%. With the crash in resource prices, distributions have been slashed or suspended across the marketplace (not everywhere, but about half of the typical portfolios distribution have been suspended).

Investing your capital with an individual or business or government is saying something. It's saying that you trust or value that person, business or government. In economics, our dollar is our vote. And your investment is your vote for the brightest future for your money and you.
Personally, when i let someone know that i trust them, I do so knowing that they will reciprocate that trust. that's what real trust in life and relationships is built on. trust is a mutual obligation and care for the point of view of the other in that relationship.

When i say that i trust a company and i want to vote for that trust with my money to the tune of $100 000, I like to know that the company will be grateful and will return the favour of my trust. they will not only agree to pay me back all of my money by a certain date, they will pay me a competitive rate of interest for as long as they have my money. Wow... but wait, there's more. if business goes bad, and they start earning less money, the business will promise to cut the money it pays to all the other investors BEFORE they ask me to stop recieving my payment. In fact, My payment is the very last (behind pensioners) they will ever cut and if they go out of business (god forbid) they'll sell off whatever assets they have to at least give me back some of my original investment (again, only behind pension plans in priority).

wow, what company issues stock like that? it must be GOOGLE or APPLE or some amazing new eco-energy company based in the rainforest, that has a fair-investor holisitic spiritual corporate culture.

It's a bond, it's the biggest, oldest and safest form of investment and you better educate yourself on the intrinsic advantages of investment grade corporate and provincial bonds or you will be like one of the many in this economic downturn who has lost 50% of their retirement savings. i will continue in my modest, informed and trustworthy habit.

Saturday, April 11, 2009

5 is greater than 7 when 7 becomes 3

Yes. It is possible. This is what happened to many people this year. They had a great deal of money invested in energy stocks, financial products and mutual funds. Not only have the mutual funds lost massive amounts of value, some of the financial products are completely bankrupt. Now, energy stocks, in an effort to keep the company alive, have slashed or suspended dividends. In the previously demonstrated portfolios, a 50% reduction in the dividend payouts would mean that the total earnings on the 'stock' portfolio investment would be set at roughly $12000.

contrast that with the 'bond' portfolio which still pays the same $15000 but because this meltdown has created a buying opportunity for corporate bonds, the chance to increase the return with some invesment grade longer term bonds (average duration of 6 years) is substantial. AND YOU HAVE 100% of your captial. you lost nothing in the meldown, provided you hold all your bonds to maturity.

i can't make the case any simpler than that. i hope some novice investors out there or even some experienced investors who have been doing things the wrong way find this blog and think about it. go read around on the internet and go to the library and look for books on the canadian bond market. IT IS "IN YOUR BEST INTEREST" TO DO SO!

Friday, April 10, 2009

why 5 is greater than 7

looking back at those two portfolios. they are modest, six-figure portolios that could represent an inheritance, a personal pension, a life-time of savings or just one part of a larger portfolio. but for argument's sake, let's say your old, retired and have paid off everything, your home, kids, medical bills. your healthy, active, retired and free. well, it's possible that $15000-$18000 would be enough to pay all your bills and even have some extra to reinvest every year (consider the left over cash in this case to be spent on grand kids or vacations etc. if you were married and your spouse had worked and saved, you would likely be even more than able to pay the bills, have something left over and avoid spending any of your principal.
So, why not go with the portfolio that offers more money.
that is the line of reasoning people have been fed for the past 30 years. and given the current prices it's hard to argue against that logic. placed in historical context, the difference in the two portfolios becomes clear.

the 'stock' portfolio has the following advantage:
-currently, the cash return is higher
-the taxes are greatly reduced
-the possiblity exists for the share price and dividend to increase
-almost half the principal is fully protected in government savings bonds

the 'bond' portfolio has the following advantage:
- the return is still high enough to pay the average cost of living for an individual who owns their own home in canada for a year
- the cash return is guaranteed*, ahead of preferred shareholders and common shareholders
- the principal is guaranteed* to be returned at the specified dates
- choosing longer maturities with each return, will result in the real growth of cash return
*remember, real guarantees are not absolute and homework must still be done to have confidence in an investment grade bond not defaulting

on face-value, the danger of interest rates falling too low seems to put the bond portfolio at a disadvantage. while it is true interest rates are very low, this information should be considered in the context of our current economy, which is experiencing deflation. meaning gas is cheaper than last year, food is cheaper, electronics, cars, and homes are cheaper. it really is possible to pay all the bills with that amount of money- provided you are in good health and/or have effective medical coverage (not expensive in canada).

Regardless, these are current prices and yields and all those stocks represent buying opportunities right now.

But what if it wasn't right now. What if it was a year ago, with those prices and yields.. and suddenly the market tanks. It loses 35% of it's value. the revenue streams of several of your stocks have been hit hard and will continue to have trouble until the economy bounces back to growth (which everyone thinks is a long way off). what happens when the face value of the stocks dips 35%, the dividends become too expensive for many of the companies that relied on a growing economy. earnings and dividends could be cut in half.

where does this leave the two portfolios?

Disadvantage of the 'stock' portfolio:
- face-value of your investment is at risk to go all the way to zero
- common shares are the first to have their dividend reduced or stopped all-together
-interest from canada bonds is not enough to pay cost of living without dividends.
-long-term bonds are much must susceptible to inflation and interest rate risk

disadvantage of the 'bond' portfolio:
- lower returns means less income
- higher tax rate
- some interest rate risk and hyperinflation risk

the risk for the bond portfolio if the economy is in recession and the stock market crashes, is that interest rates go down and inflation rises. in this type of environment it is next to impossible to earn a return that will pay the bills.

the risk for the stock portfolio is that half your investment could get literally wiped out. in this situation 35% of the value of your stocks was evaporated. meaning now you only have $235000 of your $300 000 and the dividend has been cut in half overall. you would be left with the same inability to pay your bills with your return and you would have lost 65000 into thin air.
i apologize if the math is wrong, i'm just trying to illustrate a point about what happens when you experience significant losses.

which is a worse worst case scenario? which is a better best case scenario? what does that mean about the correct way to invest money?
you probably know my feelings on the those issues, but i'll elaborate in my next posting.
anybody reading this?

its so sad to see people waiting for their IA these days

i've been experiencing something new whenever i visit my investment advisors. Usually, i am not in the reception area alone, and there are typically a few of, what look like to be, fellow account holders with the financial institution. As i wait for my advisor (he's older and slower than most...) i see a few more of these people coming and going, sitting and shuffling.

This initself is nothing new. What is new is their expression. The furrowed brows, the wringing hands, the tapping toes. These people are feeling desperate. if you began your investing career with the goal of a seven-figure portolio, if you were reaching retirement just as you seemed destined to reach that goal, only to lose half.....

I hate to say this, but seeing these people suffer- if only in my head and for a brief moment-brings a great deal of satisfaction. Knowing that i was not jealous when these same people likely bragged of a 15% return on their foreign exchange mutual fund. never mind that their advisor-recommended hedge fund, which charged a m.e.r. of 25% of all earnings and 3% of the invested assets, is now broke.
I never got interested in the products they used to brag about. i never minded when people looked at me like i was the most conservative person they'd ever met when i told them i hold no more than 10% of my assets in equities. For me, the knowledge that bull market, or bear market, i would still earn my steady, approx. 5% return AFTER TAXES AND FEES has always helped me sleep at night. if i make 4.5%, if i make 6.5%- that's the way the economic cycles will go and (if the world economy doesn't totally collapse) i will always able to plan and live without spending any captial.

my satisfaction comes not from the losses that these people have suffered, but from the verification of the knowledge which i always hoped to be true in a situation like the current economic meltdown: proper investing means dealing with neither the exuberant and lucrative gains nor the crippling and impoverishing losses. If you really did your homework as an investor, like i did, you would have NOT LOST A SINGLE PENNY DURING THIS RECENT MELTDOWN!!!! In fact, i still consider things to be business as usual. Is that valuable information to you? to me it's priceless.

i say this because it's important to understand that yield is not necessarily tied to risk. the appropriateness of your investment to your investment needs is the crucial factor in understanding how to invest your money and avoid taking a 50% loss of your net-worth (like the weary-eyed waiting-room people at my financial instiution). It is also necessary to understand this same point about yield and risk when discussing the previously posted "bond" vs "stock" portfolio.