All posts by Alain Guillot

About Alain Guillot

My name is Alain Guillot. I was born in Colombia. I speak and write three languages (Spanish, English and French), but none of them very well. If my friends don't edit my writing you will find many spelling mistakes, for that I apologize. I created this blog either because I like to share my thought with the rest of the world, or because I am in constant need of attention, it fluctuates from one extreme to the other in any given day. The subjects that I like to discuss are: the stock market, tango dancing, real estate, marketing, writing, public speaking. I also venture into politics and religion but not as much as I would like ( I am afraid of the reaction that my comments could create). Please feel free to contact me through any of the social media, my email or the comments section after each blog.

How I deal with not having bonds in my portfolio

New year party with friends

I want to share what are my market expectations and how I deal with not having bonds in my portfolio.

Ever since I started studying finance I have learned a few recurring themes:

  1. Over the long run, stocks outperform bonds
  2. People add bonds to their portfolio to reduce volatility
What are my portfolio expectations

A few research papers suggest that on average, the stock market (Canadian/US) goes up about 10% per year. Other researches say that the market has become more competitive and now we can expect returns of about 8% per year. Taking all this information, I have decided that I will be happy if my overall return is 6% per year. If I earn more, great. If I earn less, I will be disappointed.

This is a weekly graph of the the TSX for the past 12 month. The blue line represents the ups and down of the Toronto Stock Exchange, the red line represents my expectations from the market which is the 6% line.

During the past 12 months I have built a margin of safety of 5.8%. The TSX had gone up 11.8% and I would have been happy with a return of just 6%. This means that If the TSX drops tomorrow by 5.8%, I am still good. At the same time, if the market doesn’t drop, I feel as if I had won the lottery. Imagine that one day the insurance company calls me and tells me: “Ever since we have been insuring you, you haven’t had any accidents, we would like to give you your money back.” This is the same idea. I imagine that the money above the 6% is NOT my money, it’s the insurance’s money, but if nothing happens, I get to have my money back.

When people invest in bonds, they are reducing their volatility, but they are cutting their returns as well. I believe that if they just change their mindset, they will be able to better handle volatility. Remember bonds ARE NOT safer than stocks, they are lest volatile. Over the long run, stocks are as safe as bonds.

Let’s face it, over the last year bonds had a yield of about  2%, the TSX had a return of about 12% and the S&P had a return of about 12.5%. If had a 50-50 portfolio, my return would have about 7%. Good, but nothing to brag about. .

As for my real portfolio. I am ⅓ in Canadian stocks, ⅓ in International stocks and ⅓ in US stocks. My total return for the past 12 months was about 11% and my margin of safety is 5%. In my mind I have gained 6% and I have a 5% insurance policy.

In my next blog I will talk about how to reduce overall portfolio volatility by adding an assortment of uncorrelated assets.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

Passive investment outperforms active managers in and outside Canada

Going to the movies with friends.

The robots are outperforming the humans. According to SPIVA, a research group which measures the performance of mutual funds managers vs passive index,  the Canadian Index (S&P/TSX) has beaten active mutual fund managers hands down.

This is how the S&P/TSX had has out performed active managers.

  • 1 year: 73.5%
  • 3 years: 76.9%
  • 5 years: 71.2%

There are many reasons for the index outperforming:

  • Management fees are 2% to 2.5% versus 0.10% for index funds. That is a  2% difference. This is a big drag on performance.
  • Many managed mutual funds are closet indexers. This mean that they tell the public that they do active management but most of the stocks they own are the same as the stocks in the index. So their portfolio is similar to the index and then they slap a 2% markup to compensate for their salaries and marketing expenses.
  • Cash drag. Managers keep a portion of their portfolio in cash, they do this to have money for redemption or to be ready for opportunities. Either way, cash money is money that is not working for you.
  • Trading expense. It costs money to buy and sell stocks, even in today’s low commission environment, when you buy/sell millions of dollars in stocks, this will add up to the cost.
  • Buy & sell spread. When you buy stocks you buy them at the price which they are offered and when you sell them, you sell the at the price some one else is willing to pay for them, this spread between buy and sell is small in big companies and larger in smaller companies, but it is there, always creating a drag on your performance.
  • Trailer fees. I call this the kickback which mutual funds pay to advisers who recommend their fund. If an adviser sells you fund XYZ, he will get compensated, every year, for as long as you keep your money in that fund. The trailer fee is generally 1%. This is one percent which doesn’t add to your performance, it goes straight to the adviser’s pocket.

Many investors are waking up to this reality. Thousand of people are dumping their actively managed fund and buying whichever index best represents their investments goals.

Conclusion

If over 70% of actively managed mutual funds don’t beat the index, why pay for inferior performance? Get an index fund and dump your actively managed fund.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

Investing in the US for Canadians

Eating with friends before going to the movies. Dec 20/2016

My portfolio is ⅓ Canadian, ⅓ US and ⅓ international. In addition, the US portion is in US dollars.

Most investors, all over the world, have a country bias. They like to invest in what they know and of course, they know their national companies therefore that’s where they invest.

It is important, specially for investors of small (economically speaking) countries such as Canada (Canada is only 2% of the global economy) to diversify outside of their country’s economy.  A person invested exclusively in Canada, is a person who is under diversified and is highly exposed to Canada’s specific risks. In fact, the Canadian economy is mostly dependent in natural resources, in particular oil. A big drop in oil prices could be devastating for the Canadian economy.

The first step towards diversification ( for a Canadian) should be to invest in the US. The US has a more mature economy, it is broadly diversified and we are already familiarized with most major US companies.

The most efficient way of investing in the US is by buying broadly diversified ETFs or mutual funds which represent the whole US Economy. With one click you can buy the S&P 500 index which represents the largest 500 companies in the US. Or the Total US market index.

The next question should be: If I invest in the US market, should I do it in US Dollars or Canadian Dollars. For most Canadian, investing in Canadian Dollars should be good enough.

How do we invest in the US?

I like investing through a company called Vanguard. They have built a great reputation of low cost and reliability. Another leader in the industry is Black Rock. But be aware that all major Canadian banks offer similar ETFs and Index funds.

Which one are my favorites?

In US Dollars I like Vanguard’s VOO which represents the S&P 500 and it has an expense ratio of only 0.04%. This means $4 for every $10,000 invested. I also like VTSMX which provides exposure to the whole US stock market. This one has an expense ratio of 0.15%.

If you invest in Canadian Dollars, I like the VFV (S&P 500) with an expense ratio of 0.08% and the VUN (Total US market index) with an expense ratio of 0.16%.

Disclaimer. Please note that I am sharing my personal situation with my personal risk tolerance. Don’t blindly follow what I share in this article. Talk to a “fee only” financial adviser and share the idea of diversifying out of Canada with them.

Pay lower taxes by investing in Index funds

Celebrating Christmas with my friends.

Taxes is our biggest expense

Our biggest expense is neither food, nor housing, nor transportation. No, our biggest expense is taxes.

Here in Canada, we have many privileges not found anywhere else in the word. We have a stable government, low crime, acceptable medical service, job opportunities, etc. But we pay dearly for all those benefits, we pay some of the highest taxes in the world.

There are ways to pay less taxes

The first thing is to take advantages of all the tax shelters offered by the Canadian government. Some of those tax shelters are RRSPs, RRIFs, RESPs and TFSA. We will talk about each one of those in future posts, but in general, you can eliminate completely, or postpone for many years, taxes on the money earned within those tax shelters. The biggest problem with those tax shelters is that there is a limit on how much money you can put in them. For example, I can only put $5,500/year in my TFSA.

How can we invest the money that can not be protected from taxes?

Stay away from bonds or any kind of interest revenue. This kind of revenue is taxed as regular income. You pay more taxes on $1 earned from interest income that in $1 earned from dividend income of capital gain income.

The income which is taxes at the lowest rate is capital gain income.

Then problem arrives when you buy actively managed mutual funds. Those mutual funds have a lot of buying a selling within them, and you the investor, you are responsible for paying for those capital gains. This is surprising for most investors because as far as they know, they are not actively buying and selling, they are buying and holding. It is very unpleasant to see a tax bill at the end of the year.

The best way to lower your tax bill or  is to invest in Index of ETFs.

Index funds are highly tax efficient because there is not an active manager constantly buying and selling securities. The index fund represent a basket of stocks which mostly stay the same.

For example, the Index fund which represent the 60 biggest Canadian companies is composed of the 60 biggest Canadian companies. The Index fund which represents the Dow Jones industrial Average, always has the same 30 companies. There is no much change in one of those indexes from one day to the other, for the most part, the index fund, never buys and never sells.

Index Funds and ETF not only offers the highest returns in the stock market, when compared against mutual funds, but also offer the most tax efficient way to invest in the stock market.

I think that we should forget completely about actively managed funds and embrace completely Index funds.

Do you own any actively managed funds? Any index funds? Let me know in the comments.

How to save money while getting fit

This is my home gym

I have been going to the gym for years. When I was younger I used to do lots of sports, among them bodybuilding and power lifting. At that time I used to desire to have a body like Arnold Schwarzenegger and I used to put the hours to in the gym to achieve my goal.

As I grew older, my goals shifted to just being in good shape.

I tried two gyms in my neighborhood. One is called “La Cite,” and the other one is called “M Fitness.”

home exercise equipment.
This home gym belongs to a good friend

La Cite it was in the basement of a building. It had all the equipment I could ever need. I went there for about three or four years and I was generally happy except for one little thing: there was not a place in the gym where I could look and not have a TV screen right in my face. Over the years it became intolerable and eventually I left for the other gym in the neighborhood.

M Fitness was smaller but cleaner and better organized. Also, it was in the third floor of a building and it had plenty of sunlight. I was happy… for a little while. The one thing that started to bother me was that the music was too loud. “Hey, this is not a bar, I’ve like to listen to my own headphones.” My complains were to no avail. I was never able to listen to my audio books nor to my favorite podcasts.

friend hugging each other
Mastermind meeting

To all of you gym owners or managers, certain people go to the gym just workout. If someone wants to watch TV, I am sure they have a good TV at home. If someone wants to listen to loud music, there are hundreds of bars in the neighborhood.

Frustrated with my lack of choice, I decided to workout at home. I bought a few weights, a yoga mat and started to work out in my own ambiance. Now I love working out at home.

These are the reasons why I love working out at home
  1. I am master of my ambiance. I put my favorite podcast or
    Norma’s excise machine

    audio book and I don’t have to worry about the noise some one else is making.

  2. I save tons of money. My workout equipment cost me about $100. That’s it. I don’t ever have to renew a membership. From one year to the next I might buy more weights, but that will only from $20 to $50 a year.
  3. I save lots of time. Imagine the time it takes to put on winter clothing, boots, gloves, etc, walk to the gym, go to the locker room, take it all off, put on the workout gear, take it all off, put on the winter gear again, go back home and change clothing yet one more time.
  4. I hardly ever miss a workout. Many people miss their workout because they don’t have the hour and a half that requires going and coming back from the gym, but if anyone creates a discipline of working out at home, on any busy day, they can always drop to the floor and do a few push ups.

Many people feel that they need to go to the gym, that they cannot concentrate at home, but everyone can adjust. Some routines take as little as little as 4 minutes, some of them take as long as 30 minutes.

Here are some examples
  • This personal gym belongs to Steven Tang

    Alain (me): I do 15 minutes of stretching and 15 minutes of weightlifting

  • My friend Cheryl does 1min15sec of plank, 3 sets of 10 pushups, 3 sets of 15 squats with 8lb weights
  • Rosina does yoga, essentrics, and qi gong
  • Yraida  dances and does cardio exercises following some videos from internet
  • Jang on the weekends, he gets his cardio doing the Just Dance video game.
  • Annie: Usually daily push ups and my 15-20 hours a week of swing dancing is my exercise but when I don’t hit the dance floor much I either swim at the free local pool or do some cardio and muscle exercise at home the only tools I use is a yoga mat, a 5$ skipping rope and some small weight (I got for free on kijiji).
  • Kelli: I do yoga, Pilates, hula hoop and dance, and I do all those activities with my baby now
  • Raja: I stretch for about 5min, I run outside for 20min, then I do a full body workout for about 20min: abs, push-ups, upper back, shoulders, squats with weights, kettle bell swings. Then I stretch again for 5min. Feels
  • Norma: 15 minutes cardio with the Rock’Roll stepper (very good for dancing training) plus 5 minutes cord and 10 minutes stretching

And you? Do you workout at home? Why? What is your routine?

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

 

I bought a used car

Used car Hyundai Elantra
This is my new toy.

I have been driving since for about 35 years. All my life I have bought second hand car. Some have lasted a long time, some have died soon after the purchase. In my mind, I have always gotten a good deal.

Here are some examples:

  • I bought an old Hyundai Pony for $500 and it lasted one year (My first car in Canada).
  • A friend gave me a Chevrolet Cavalier which lasted about 6 month.
  • I bought an Honda civic for $1,000 which lasted 2 years
  • I bought a Hyundai accent for $3,000 which I kept for 5 years and gave it up because I didn’t need it any more.
outdoor fire place.
Winter will be over soon. 🙂

On the hunt for a newer car

  1. It has to have low gas consumption
  2. It has to provide a great return for my money.
  3. And I have to like it 🙂

Here is the result.

I bought a 2013 Hyundai Elantra for $6,000 CAN. After I paid all the registration, taxes and permits, my total cost was about $7,000.

If the car lasts me about 10 years without any major repair, I am looking at about $700 per year, or about $60 per month. When I drive for Uber, I make $60 in 3 hours. In short. I believe I made and OK investment.

Why a 5 year old car?

  • A car starts losing value the minute you drive it off the dealership.
  • Within the first few days your car will lose about 10% of its value.
  • Within the first year your car has lost almost 20% of its value
  • After 5 years the car has lost about 60% of its value.

I think that buying a 5 year old car for only 40% of its original value is a good deal.

Enjoyment.

I really like this car. It is slick, fast, it’s like a toy. I have been driving it for a couple of weeks and every time I jump on it I have a lot of please with the acceleration and the shifting of gears.

What was the last car you bought? Do you think you got a good deal? Did I persuade you to buy used instead of new?

Please share your comments below.


Source: How Fast Does A New Car Lose Value

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

ETF or Index Fund? Which one should I buy?

ETFs or Mutual funds?

A regular investor has four investment vehicles.

  1. Bonds. I don’t recommend bonds because on the long run they always under-perform stocks.
  2. Single stocks. I don’t recommend single stocks because you have two risks; the stock risk ( lower profits, corporate scandals, etc. ) and the market risk (this risk can not be avoided).
  3. Mutual funds. I strongly discourage actively managed funds and equally promote index funds.
  4. Exchange Traded Funds (ETFs). Which are extremely similar to index funds, except on the way you buy then and sell them.
If you were my sister or my good friend, which one would I recommend to you

Both, ETF and Index funds are in all practical sense the same investment. Let’s say that I am interested in the Toronto-60 (which is an index of the 60 biggest Canadian companies). Both the ETF and the index will have exactly the same 60 companies.

The only difference will be on the way you buy them.

Let’s say I have $10,000. If I want to buy the ETF, I would go to my broker account, let’s say at 11:00 am. See what’s the price, imagine the price is $25/shr, and buy 400 shares. Most brokers charge $10 commission, so the total cost of my 400 shares would be $10,010.

If I want to buy the index fund. Most likely I will not have to pay a $10 commission, but my order to buy can only be executed at the end of the trading day. Let’s say that at 4:00 pm the stock closed at $25.05 then my transaction would cost me $10,020. On the other hand, they could had closed lower, let’s $24.90 and at this lower price, I could have saved a few dollars.

The bottom line is that with ETFs you have a bit more control over the purchase price than with index funds. But on the whole scheme of things, if you are investing long term, If you are planning to add this investment in your TFSA for many years, this little discrepancy should make no difference one way or another.

Buy this one if you have no money

However, let’s say you are my little sister, and you don’t have $10,000 just sitting in your checking account but could put $200 every month. In this case, an index fund would be the overwhelming choice. With an index fund, you could just buy $200 every month without paying a commission. The index fund company would even allow you to buy fractions of a share. Let’s say that after the first month, the price went up to $25.15. You could buy 7.95 shares.

To summarize, If you have a chunk of cash and you are planning to invest for a long time, it doesn’t make any difference if you invest in mutual funds or ETFs ( for the record, I prefer ETF ). But if you don’t have that much cash but you are willing to make periodic small purchases, then index fund would be the way to go.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

Window dressing, mutual fund lying to their clients

Window dressing, spending time with friends
Hanging out with friends

We window dress in our lives all the time. When people post pictures in Facebook, they post the happy moments, they are displaying their best smile. We don’t see how they look in between each one of those photos.

Mutual funds company are supposed to report their holdings at the end of each quarter. This is when they show us their best picture, However, This report does not reflect the holding the fund held during the previous 89 days. By the time a client reads the prospectus the fund could have a totally different portfolio. In short, as a mutual fund investor, you will never know for sure which equities you have in your portfolio.

What is Window Dressing

In order to show the best face for the public, many funds engage in the practice of window dressing, this means that right before the quarterly report they get rid of losing stocks and buy the best-performing stocks in the market.

Imagine a fund that trades in the technology sector. Imagine that Google went up 20% while Apple went down 15%. What the fund would do is to buy Google and sell Apple. That way, when the investors get the report, they will believe that fund manager was able to choose the rising stars and drop the dogs. But it’s not true, it’s all make believe.

Since there is a lack of transparency in the mutual fund industry, managers also get away with buying stocks which are outside of their mandate. For example. Imagine a mutual which claims to invest exclusively in big companies. Well, this mutual fund has an 89-day window to buy stocks in small companies and then get rid of them before the next report.

What are the problems with Window Dressing

The biggest problem is the lack of transparency. The investor deserves to know which stocks he owns at all times. What if he doesn’t like to have stocks which deal with arms, tobacco or alcohol? Doesn’t he deserve to know?

The next problem is worse, I call it buying high and selling low. This is totally the inverse of what an investment should be, but if a portfolio manager buys a stock after it has gone up, to showcase it in his portfolio, he’s buying high. And if he’s getting rid of poor performers because they are an embarrassment for the portfolio, he’s selling low.

The last problem that I see, it the excessive transaction cost. When the fund manager buys and sells stocks simply to showcase them in the portfolio, he is engaging in a lot of transactions. These transactions are expensive and they drive down the performance of the portfolio.

What can you do as an investor

The best thing to do is not to have actively managed funds in your portfolio. Instead, opt for index funds or ETFs. With index funds, you know exactly what you own at all times and in which proportion. For example, when I buy the XIU (iShares S&P/TSX 60 Index Fund) I know that I own the 60 biggest Canadian companies on the Toronto Stock Exchange. There is no mystery to that. I know 365 days a year what I own, I don’t have to wait once a quarter to find out.

I don’t have to worry about excessive transactions and about buying stocks when they are high and selling them when they are low.

Overall, index fund investing has proven to be an investment strategy which is totally transparent, has little or no transaction costs, is 10 times less expensive than actively managed funds and has proven, with time, to outperform 90% of the actively managed funds.

Action steps

Next time you see your financial adviser, ask him about index funds and ETFs.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

Asset Allocation, my opinion and how I do it

Doing a speech evaluation at McGill Toastmasters

Disclaimer: Please be advised that this article represents my opinion only. I am not suggesting you do the same.

Asset allocation

Ever since I got my first finance book, I have been reading about the bond vs stock asset allocation ratio. In theory, the percentage of bonds vs stocks in your portfolio should change every year. The older you get, the bigger the bond ratio should be.

Financial advisors only recommend bonds and stocks because these are the asset classes for which they can get a commission. There are many other asset categories which are completely ignored. For instance, my asset allocation is 50% stocks and 50% real estate.

My stock portfolio is divided as follows: 33% Canadian, 33% US in US dollars and 33% international in either US or Canadian dollars. For the moment I only use ETFs (mostly from Vanguard). I don’t use (and I recommend never using) actively managed mutual funds.

Stocks are as safe as bonds

Financial pundits will tell you that bonds are safer than stocks. But that is not true. Stocks are more volatile than bonds, yes, but not necessarily riskier. Let’s not confuse volatility with safety. At any 30 year time period, stocks has never lost money (in North America) and it have always outperformed bonds. The historic rate of return for bonds is about 2% and the historic rate of return for stocks is about 8%.

It is suggested that, as we age, our bond portion should increase and our stock portion should decrease.

Why would you shoot yourself in the foot

Many advisers, recommend to start adding bonds to your portfolio as early as age 20. Really? A person in their 20s has about 60 more years of life and already a financial adviser is handicapping the growth potential of his portfolio.

Another advice which kills me is to have about 65% of your portfolio in bonds at the time the person retires at 65 years old. Really? A person who made it to 65 could easily live past 90. So for 25 years, the growth will be hampered.

My personal situation

As I mentioned, 50% of my portfolio is in real estate. Eventually, I will sell my real estate and I will be 100% in stocks. I am planning to hold stocks until the day I die. I will not have bonds. The price to pay for reduced volatility is simply too high.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

Financial advisers are double dipping

Hanging out with my friends.

Not too long ago, a friend of mine showed me the statement coming from her financial adviser. It was from a company called R——- Wealth Management.

Immediately I noticed several things.

  1. All the investment were in actively managed mutual funds, with management fees between 2% to 3%. The main reason for these high fees is that mutual fund companies generally give a kick back to the advisor who sells the fund, these kick back is called the Trailer Fee. The fee is generally about 1% of asset. As long as the investor keeps his money in that fund, the advisor will get his kick back every year, even if never speaks to the client ever again.
  2. In addition to the selling funds which generates the greatest kick back for the advisory service, they charge and advisor fee, every month, to the client. This reminds me of the time I got a traffic ticket in which I was charged for the violation plus a service fee for giving me the ticket.
  3. Although my friend went to the advisor with her husband, both of them were sold exactly the same portfolio. The advisor didn’t see them as a couple, but as two different individuals to whom they could sell the same cookie cutter predetermined portfolio.

The example of my friends is not unique. There is hardly any financial institution in Canada who will offer index funds or ETFs. The main reason for this is that index funds and ETFs don’t offer kickbacks to advisors, so advisors have no incentive to offer them to their clients. None of the big banks in Canada will ever offer you index funds or ETFs, they will offer you their branded actively managed funds.

Considering that most actively managed mutual funds charge 2% to 3% fees, here are some ETF that you can use as comparison.

iShares S&P/TSX 60 Index ETF. This fund is composed of the 60 biggest Canadian companies. Their expense ratio is 0.18%. Wow, that is a long way from 2-3%

If you invest in the US. How about this one: The Vanguard Total Stock Market ETF with a expense ratio of 0.05%

The alternatives are numerous, but only by being aware of this abuse you can protect yourself. Stop contributing to your advisor’s retirement and contribute a little bit more to yours.

In life, generally you get what you pay for, but that rule does not apply to investments. In investments, you get to keep what you don’t pay for.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.