Archive for the ‘Introduction’ Category

One Big Difference Between Closed-End Funds And ETF’s

By: Pete | Date posted: 05.17.2012 (9:17 am)

There has always been a lot of confusion regarding the differences between Closed End Funds and ETF’s. There are a lot more ETF’s being traded but in some instances, the providers decide to go with Closed End Funds. Why? Let’s take the case of Sprott commodity funds that hold Gold or Silver. These funds go out and buy physical bars of gold and silver and then have to store those. It’s quite a process and as you can imagine, it’s not something that the fund wants to do every day.

Difference Between Close End Fund And ETF’s…

There is one big difference that you might not think is that important. For an ETF’s, brokers are able to create or “redeem” units. What does that mean? Imagine a bank like Citibank starts selling units of fund XYZ which are very popular. What would they do once they have almost none left.

ETF: Citi could contact the ETF issuer and buy a number of units at the actual value of the fund (NAV)

Closed End Fund: There would no way to buy from the issuer, Citi would thus need to buy more of the fund XYZ in the market but also sell less.

How would Citi pull that off? There is no magical solution. Citi would be forced to sell XYZ at a more expensive price. Eventually, for some very popular funds, the impact would be that all brokers would end up doing this and the fund XYZ could end up costing much more than the actual value of the fund, its NAV.

ETF’s > Closed End Fund

For investors, it’s much more advantageous to buy ETF’s that will generally trade much closer to what they’re worth. On ETF’s, many firms and market participants will do “arbitrage” where they buy or sell the ETF if it moves away from the NAV. For ETF’s with liquid underlyings, that ensures that they generally remain very close to the NAV at all times making it more predictable what investors will be able to get by trading them.

If I look at PHYS, the Sprott Physical Gold Closed End Fund, it had a NAV of $13.17 and closed at $13.80 (4.6% difference). That is a very significant difference.

Compare that to GLD, the Gold ETF which had a NAV of $153.08 and closed at $151.99 (0.7% difference)

Do you take into account the fact that a fund is closed end or if it is an ETF before buying shares? Or you do not care?

Why It Makes Sense To Build Your Own ETF Portfolio

By: Pete | Date posted: 05.17.2012 (9:13 am)

We had published a post on one of our main blogs recently where we calculated the impact of saving 1% in fees annually. Of course, depending on how much money you have to invest, the impact of 1% will be significantly different.

How Much Are We Talking About?

In the post that you can read, you will see that in that case, for an investor that had $100,000 and invested $12,000 per year, the difference amounted to over $600,000. Compounding has a major effect and also the fact that in the later years, when an investor has $1,000,000 invested, a 1% difference is $10,000. That is very significant. How some investors can not take the time to look at such savings is beyond me. Since most financial advisors have conflicts of interest, they will rarely direct you to the best and cheapest alternative. In a perfect world they would, but they rarely do in reality. I don’t know too many individuals that would not take the time if it meant saving $600,000 once they reached their retirement.

Can You Really Save 1%?

I personally think 1% is a very conservative amount. Studies have shown that most mutual fund investors end up paying north of 2% in annual fees on their holdings. Compare that to ETF’s which very rarely charge more than 0.50% if you choose them well and you will see that the 1% figure is probably too conservative. Add to that fees to enter and exit positions, all types of maintenance, fx conversions and you will start to get an idea of just how much you are paying to have that money managed by someone else.

So Will I Automatically Save On Fees?

No, you will not. While building an ETF portfolio means savings tons in annual fees, it also means trading fees which means that smaller portfolios will end up paying commissions that can end up being significant. Of course, as the portfolio becomes bigger, the commissions are likely to remain more or less the same meaning that as the portfolio gets bigger, the fees in % will drop significantly.

That being said, paying an 8$ commission on a trade but the saving 1-1.5% year after year seems like a great deal to me, don’t you agree?

5 Downsides To Building Your Own ETF Portfolio

By: Pete | Date posted: 11.23.2011 (10:47 am)

Yesterday we wrote about the top benefits of building your own ETF portfolio and I think it’s very clear that the benefits of building your own portfolio, managing and taking control of your finances outweigh the costs. That being said, I’m not nave enough to think that there are no downsides to building your own ETF portfolio. There are. Here is a breakdown of those that I consider to be most important.

Time: While the required time is much less than most of you would probably expect, it does still require more time than if you gave the whole task to your financial adviser. The initial steps, the setup process are by far the most complex and unfortunately that causes many investors to never get started. I highly recommend that you sign up for our step by step free mailing list, it will help you out in a big way in terms of not feeling overwhelmed. That being said, once everything is setup, you can easily get by on 1 hour per month or so.

Complexity: There is no doubt that no matter where you start from, you will have a lot to learn. It can certainly seem overwhelming if you try to do it all at once but once you start breaking down the steps, narrowing down the number of ETF’s and trading only once or twice per year brings down the complexity to something much more manageable.

Abstract Benefits: When you go to the store, use a coupon or find a special, the benefits and the money saved is very obvious. Unfortunately, that is far from true when you are managing your ETF. The savings are substantial but they are not obvious or easy to calculate. You can approximate and a good way to do so is to use the spreadsheet that we posted on Experiglot (another one of our websites) that shows you how even saving 1% can mean an incredible difference. I do understand that it can be easy to put off a switch to ETF’s when the money that you save per day or per week seems minimal. Time and the compounding effect make the switch incredibly important.

Error Risk: When you are new to trading and using financial markets, it can be scary to make a mistake. Fortunately, when trading ETF’s, the risk of making an error are very limited and you would likely be able to get out at little cost as long as you notice it. I guess we run similar risks in a lot of other aspects of our lives, it’s just about paying attention and being disciplined.

Becoming Older: While there is no doubt that if you are reading this, chances are very good that you are ok to manage your own portfolio, the fact is that one day, we all get to the point where it’s no longer the case. Not having someone to manage your assets can certainly be a problem. This is a problem that we will discuss in length but there are of course many ways to deal with this.

Can you think of more downsides to trading your own ETF portfolio? If so, what would they be? How significant do you consider them to be?

5 Benefits To Building Your Own ETF Portfolio

By: Pete | Date posted: 11.15.2011 (11:27 am)

There are probably a hundred different reasons why you would want to build your own ETF portfolio but I think there are 5 main benefits that by themselves are important enough for you to take action. A reminder, you can get a step by step action plan to set it up by subscribing to our email list, it is free!

Without further wait, here are the 5 main benefits:

#1-Savings1% annually or perhaps a bit more can sound insignificant but if you take into account the time period and compounding effect, it becomes an amount that will have a dramatic impact on the lifestyle that you will be able afford later on in life. A few more trips every year, less stress, more to give out to kids, etc. That all looks to me like it’s worth the time investment, no?

#2-Transparency – Would you be surprised if I told you that the vast majority of investors have no idea what they own, how market volatility impacts them, how much fees they are paying, etc! It’s amazing but true. One of the most important aspects of our lives that influences every other thing left out to a stranger. I think knowing what you own, what to expect, how world events impact your future lifestyle, etc. These are all critical things for every investor to know. Honestly, it’s not rocket science even though it might sometimes seem that way. What we preach is systematic, clear methods that will help you know exactly what is going on.

#3-Flexibility – If you work hard, save and invest money, shouldn’t you have the flexibility of doing whatever you want with that money? Most financial advisers put their client money in mutual funds which means that funds can be locked there for years (in order to avoid big penalties) which takes away alternatives for changes in asset allocation, or to withdraw money for any given reason (sickness, special project, etc). ETF’s make it easy to change within a blink of an eye. As well, being able to make changes without reaching your IA, discussing, etc will save you headaches. Of course, it also means that investors must be disciplined.

#4- Much Easier Than You Would Think: it seems like such a complex world but if you are systematic and use a simple method like the step by step method in our free newsletter. Almost everyone makes finances much more complex than it needs to be. Studies have shown that a simple portfolio with less than 10 ETF’s can be used as efficiently as almost any other portfolio. Remember that the goal is index/passive investing. It’s not sexy or complex but it works year after year, that’s the main thing right? You can trade once or twice per year initially and review things weekly or monthly, as you wish. Why does everyone like to make it look so complex? I think one big reason is that the more it looks that way, the less investors tend to get involved. Absent investors ask less questions, do not challenge as much and will not notice errors, high management fees or improper trading among other things. Everyone involved wins if that happens, everyone except the investor that is.

#5- Your Portfolio Becomes The Priority: No offense but I think it’s safe to say that your portfolio is probably not the biggest that your financial adviser works on. In fact, it’s one of thousands  that he looks over. I understand that he has knowledge and skills but if you figure out how much time he can actually spend looking at each portfolio, you will quickly understand how little your portfolio “matters”. Great portfolio managers will be able to take a look quickly and figure out how things look but even those will not have enough time to truly see what is going on in your life, what adjustments need to be made, etc. I think that YOU are the best person to pay the proper amount of attention to your holdings, your projects and make adjustments as you go, instead of waiting for your annual meeting and hoping that your portfolio is actually properly reviewed according to your new circumstances.

There are many other benefits to building and managing your own ETF portfolio but I hope that even a few of these are enough to convince you. That being said, there are certainly downsides and you can read about them here.

Do You Need An Adviser?

By: Pete | Date posted: 11.15.2011 (11:18 am)

One of the main questions that any investor would ask himself or herself before seriously considering building their own ETF portfolio is the following:

“Can I really ditch my investment adviser?”

There are obviously a lot of things to consider before taking such a decision. It’s important to take into consideration what the adviser is currently doing for you to start. Does he help with fiscal aspects, manage your portfolio, liquidity, your other banking needs, etc?

If you are starting off and have few assets, you do not have major needs for all of those other services. Additionally, you will not have a complex portfolio to manage which limits the risk, work and involvement to start off with. In such a case, I think that trying on your own can work just fine.

For those already working with advisers, you might be getting more services and will probably not want to take a significant amount to start off with. I doubt that starting managing $200-300K or more would be the best way to go ahead.

Why Would You Ditch Your IA?

One important problem with having an IA is that they have inherent conflicts of interest. What do I mean? For example, why would your IA buy an ETF that charges 0.50% per year in charges when he can buy one that has 1.30% fees with part of the difference being paid out to him through commissions? There are many levels of conflicts of interest but the bottom line is that they do not always act in your interest. I guess it’s normal since they must get paid somehow but I do wish they’d be more transparent about those added fees and how they add up over time.

How To Get Started If You Have An Adviser

I think one way to get this done would be to keep your current assets as is. However, additional investments would stopped being sent to the account managed by your adviser. Start building your own on the side, composed of ETF’s following the detailed steps from our blog. You can get a structured step by step by subscribing to our free newsletter. I would do that until you reach $20-30K in your portfolio. Once that is achieved, you can start comparing what is being done in your managed portfolio to what you are doing in the one you manage. Don’t only compare the returns, look at the asset allocation, the volatility, etc. Of course, you will find that it is convenient to have the flexibility in your own portfolio to change allocations, add or take out money, etc.

Over Time

Later on, if you become comfortable with managing your own portfolio, you can keep growing the size of that portfolio and you will then have a choice to make. You can determine if the pros of managing your own money outweigh the cons. Remember, it’s not a black or white decision!!! You can have both although you’ll need more assets to justify doing that. Why? The best investment advisers will not sign up a client that has $50K in savings.

Should You Tell Your IA?

There is no doubt that almost any IA will discourage you from managing funds on your own. Why? There are so many reasons but they come down to these 2 main ones:

It’s Not In Their Interest: A growing portion of investors are doing it on their own and it’s certainly not good news for IA’s. They earn less if they have less assets under management.

They Might Not Understand The Strategy: If they are telling you that it will take up too much of your time, be too costly, etc, they probably do not understand what all of this is about. Thanks to our systematic strategies, it becomes very easy and does not eat up much time at all.

In the end, it might be worth it to have an IA working for you but like everything else, you need to be sure that the services that you are paying for are worth the price. I would not ditch your IA right away but simply keep him on, see how things go now that you have a basis for comparisons.

What are your thoughts on having an investment adviser? What benefits do they bring you?

Take Control Of Your Finances

By: Pete | Date posted: 10.28.2011 (1:28 am)

What are the most important parts of your life? I’m sure your loved one, friends and family, your health, are all on the top of that list as are probably a few hobbies, sports, etc. I don’t think there are any doubts that your finances will have a major part in all of those factors. Money does not buy happiness but in many cases it does help. Do I need to provide examples? Being able to get good health care, insurance, help out friends and family, being able to take family vacations, to live a few dream trips with your loved ones, etc. All of those things have at least some relation to your finances.

I would personally consider health, and those close to me to be my top priorities but finances has to be at that next level. Most of us trust our doctor with our health, making sure that we do not have cancer or any other serious health issues. That being said, I would think that most of us still spend a decent amount of time doing their own research. What is important to eat? How important is it to practice sports? It’s safe to say that very people rely only on their annual visit to the doctor’s office to improve their health, feel and look better. However, a large portion of the population does exactly that when it concerns their finances. If you recognize yourself, I’d love for you to drop a comment. Why is that the case? What makes you think that those taking care of your finances are doing their job well and that you can trust your entire financial future in their hands?

I think it’s critical for everyone to take control of their finances. Even if you end up not wanting to do more, it’s still important to know what you own, what you are putting aside, how much fees you are paying and how the markets and everything else that is happening in the world impacts you, your finances, your projects and how your eventual retirement will end up looking like. We are all busy and have to leave some things aside. Taking care of your finances is NOT one of them.

How To Take Control

Step #1 – Get Some General Idea Of The Market News

How? You can start by not switching channels when your news program explains what is happening. It usually lasts only a few minutes and will give you a good start. You can also start by reading the headlines every day of a website such as MarketWatch. In most cases, the headline will give you the basic information that you need.

Step #2 – Find Out What You Own

You should know what debts you have and what assets. Where are you invested? How much of it is invested in risky assets? You should be getting statements on at least a quarterly basis.

Step #3 – Show Your Interest

Once you have some knowledge of what you own, start preparing yourself for meetings with your banker or your IA. Have questions ready about your investments, why he or her suggests specific strategies, asset allocations, etc.

Step #4 – Subscribe To Our Newsletter

Find Out More About Starting To Manage Some Of Your Money

Who Is For?

By: Pete | Date posted: 10.21.2011 (10:22 am)

In finance, few solutions if any at all apply to all types of investors. Each investor has its own risk and return requirements, its own views on the markets, etc. Thus, I would not say that every single investor should build an ETF portfolio. That being said, building an ETF portfolio gives investors so much flexibility that I think there are only 3 reasons why this website/alternative would not fit your needs:

You have too little money: Investors that have less than $25,000 or so and do not anticipate getting over that level in the next few years should probably not go for an ETF portfolio. Why? The trading fees alone will make this alternative more costly than using other methods such as buying mutual funds.
You have too much money: Investors that are putting tens of millions of dollars into the markets can generally track indexes with less costs. That is only true for institutional investors and high net worth individuals.
Investors that do not have the time or interest to take care of their own investment portfolio.

There is nothing I can say about the first 2 reasons. If you are not able to reach $25,000 of savings in the next few years, you should really be spending more time on one of our main blogs, TheFinancialBlogger, which will help you to increase your earnings and get out of the rat race. As for those managing tens of millions of dollars, I don’t think you will start managing your funds overnight. However, some of the content on here will help you better understand how your current portfolio managers are or could be managing your money.

As For The Others

Too often, I hear about investors, generally ones that work outside of finance. They don’t want to get involved in their finances because they have too little interest or they don’t have enough time. Good try but those are poor excuses. There is no good reason to not be involved to some extent in your portfolio. There are so many reasons why you need to know but I think they all more or less come down to:

It Does Not Take As Much Time As You Think

To many, managing a portfolio seems like a complex task. I would argue that many think the same thing about filing taxes every year. Yet, millions end up doing it and realize that it is much simpler than they believed. There are steps to follow and you can get by spending only an hour or two every month. Of course, more active investors could easily spend all day as well. I think the financial industry has not helped in simplifying the process. Why? They end up making a lot more money if they can manage everything for you. That will generally result in over-complex strategies that add up fees. It’s also important to understand that you will enjoy much more flexibility knowing what you own and how it is evolving. This will also tend to encourage you to save more, which can only be good in the end.

You Need To Know What Is Going On In Your Finances

The issue of fees is a big one. You might think that 1% or 2% is insignificant but we had posted an interesting spreadsheet on Experiglot showing the huge impact of a 1% fee. Believe me, through different lays, you can easily end up paying 2% or more of fees that you could avoid by managing things yourself. Over time, that translates into hundreds of thousands and can have a dramatic impact on the quality of life during your retirement. Getting a better idea of how your portfolio is built, how much risk is involved and other characteristics is also very important.

If you would like a step by step guide into building your own ETF portfolio, simply sign up for our free newsletter here!

A Plan Is Everything

By: Pete | Date posted: 07.13.2011 (12:31 am)

It amazes me every time I hear an investor not being able to disclose goals, objectives or a precise plan. If you cannot come up with specific financial objectives in both the medium and long term, how could you possibly hope to have the retirement, live the dreams, the trips, the house, etc

The Power Of Goal Setting

No, this is not a personal development website. I still think it’s important to understand the power of goal setting. Take any study about the subject and it always comes up to the same conclusion; those who determine clear goals tend to do massively better. I’m not talking about a 10-20% difference. I’m talking tens of times more. It may seem difficult to believe but I’m not the one saying this (even though I clearly believe it’s true). Goals are critical to success in almost any type of activity. If you agree to that, how could you possibly hope to do well without having your own financial goals.

Critical Elements Of Your Financial Goals

If you work with any type of financial adviser, chances are that you already have some goals and that they are revised at least annually. That is common practice. What should your goals include?

-Required Assets and Income: Any retirement income, amounts to be left for kids in the future, trips, kids education requirements, etc.
-Current Assets, Debts and Revenues: All of these are important in order to create a plan of action
-Tolerance for Risk: How much risk can you sustain? How would you react if you lost 10-20 or even more of your portfolio within a few days?
-Other Circumstances: Are you married, do you have family, etc

Build A Plan

Once you know how much you will need, what you have and how much you can save and invest, you have the necessary base to start your plan. At this point, it becomes mostly about math. If you have X assets, you need X in 10 20 or more years, how much return must be obtained. That will then give you a better idea of how realistic the plan is. How much risk would need to be taken to get there. If the plan is not realistic or the necessary risk is too high, it’s important to find out early in order to revise the plan. Many different things can be done to modify a plan and it is much easier to do so early on than in the late stages of an investor’s life.

A Vague Plan Is Better Than None At All

I know, I know, it’s difficult to predict how the market will react over the next few decades, how much you will be making per year, how your needs will adjust, etc. I get all of that. However, if you were a pilot flying from New York to London, would you:

A) Set up a flight plan, knowing very well that it will be adjusted depending on the weather, air traffic, delays, etc
B) Depending on how things go, improvise in order to get to London

Of course, the answer will always be the first one. I think everyone would agree that is the thing to do. So why do so many individuals not plan their retirement? I don’t get it personally…!

We will soon be offering tools to help structure the process. Be sure to sign up for our newsletter to find out when these go live!

Why Use ETF’s For Your Investment Portfolio?

By: Pete | Date posted: 07.12.2011 (10:36 am)

If you have been a regular reader of some of our other websites, you know by now that we are very much in favor of ETF’s. They are not perfect but we do think that they are superior to mutual funds as you can read about here. The basic arguments are that:

-ETF’s end up being much cheaper to use over the long run than individual stocks or mutual funds
-Using ETF’s help you be more tax effective
-You will avoid excessive trading fees by using rebalancing rules
-ETF portfolios can help you get the exposure that you want in almost all cases

We had also written about ways mutual funds were superior to ETF’s but that applies mostly to investors that have lesser assets and who would probably not even be targets as we described in “Who is BuildYourETFPortfolio for“. The same applies for the very rich (tens of millions $) who will often benefit from buying the stock directly.

However, for the vast majority of us, building a long term portfolio with ETF’s is the way to go. Funds have been flying towards ETF’s and it’s no surprise. They save over 1% every year on fees alone compared to similar mutual funds which ends up making a very significant difference in your retirement.

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