Investing In China through ETFs

ETFs, or exchange-traded funds, are considered to be some of the safest forms of investment in the world today. If you are thinking of investing, and don’t mind less reward for less risk, then an ETF is what you should be looking at. Currently, China is a growing giant that will probably overtake the United States midway through the 21^st century as the world’s largest economy and that has a lot of investors thinking about getting in on the action. However, China is still a difficult investment because of the chaotic market in the country; so many investors decide to invest in China through ETFs. If this is something that would interest you, then here is how you go about it:

1. Look at various Chinese ETFs available based on their industry weights, how many holdings are in each ETF, and the expense ratios of the ETFs. Some that you can look at include iShares FTSE/Xinhua China Index, which is based off an index that has 25 companies in it. There is also the SDPR S&P China ETF and this one has more companies than the iShares ETF.
2. You should consider not only investing in ETFs that are focused in China, but throughout much of Asia, which is currently booming while the rest of the world is suffering through a recession. One example ETF that you can look at is Vanguard’s Pacific ETF. Another one to consider is iShares MSCI Taiwan Index Fund. An index fund is a form of the ETF which is often considered the safest type of stock investment in the world. Another ETF to consider is the iShares MSCI Hong Kong Index Fund.
3. In Canada, financial institutions like BMO, BlackRock, Claymore offer China and emerging market ETFs. Some of the examples are BMO China Equity, iShares China Index Fund, Claymore Brick ETF etc. A good resourceful ETF site is TMX Money. 
4. After you have done the research for your ETFs, all you need to do is talk to your investment broker about what you want to invest in, and they will take care of it for you. However, this will cost you commissions and fees so if you want to keep from losing that money, you can invest yourself. The best way to do this is to get the ticker symbols of the ETFs that you want to buy into, go into your investment account and purchase these stocks as you would any other stock.

China is a booming country that is going places in the world. It will soon be the largest economy in the world, and with the world’s largest population it is also a force on the production and manufacturing platforms. That all being said, many feel that China is still a risky investment, and you should decide to invest in China based on your own risk tolerance and unique investment objectives. However, ETFs may provide a better alternative than directly buying stocks and also, it’s  a lot easier to get in on the action as China continues to take the world by storm and generate capital for the investors who can tolerate risk and put money into this growing giant from the Far East.

With some risks, ETFs can be still better but profitable, and may be the best option when investing in China.

More A. Dawn Articles:

ETF Archive

Economics 101 – India

How Compound Interest Works

Marrakech – The Pearl of The South

June 2007 Archive

Canada’s Greenest Shopping Bag

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Compound Interest 101

When most people think about compound interest, they think about credit cards and how they lose money with compound interest. Most people hate compound interest, and they want nothing to do with it but what about if we told you that you can make money with compound interest? What about if we told you that there is the possibility to make money with something that you only think about as a bad thing?

Well, you can if you know how to use compound interest properly.

The first thing you need to do to make money with compounding interest is to start saving at a very early stage. Many experts will tell you that it is not how much money you begin to save with, but how early you begin to save. If you start saving at the age of 20, $2,000 a year, you will save $20,000 by the time you hit 30. That is much better than throwing down $20,000 at 30 and it is easier to handle on your pocket book as well. You also make more money on the money you save earlier. That $20,000 from the age of 20 to 30 will grow because of compound interest, while that $20,000 at 30 will not. The best way to look at this is with an RRSP. So let’s do some examples to show how compounding interest can work.

If someone is the age of 20 and they put in $5,000 into their RRSP, by the time the person is 65 that amount of money will have grown to $160,000 if it grows at eight percent per year. That may seem like a lot of money but it is not when you are trying to retire. Compounding interest works here because each year, the interest is put on top of the total amount in the account. Here is how:

• Age 20:   $5,000 x .8 percent    $5,400
• Age 21:   $5,400 x .8 percent   $5,832

As you can see, the interest has gone on top of the previous amount made from interest in the past year.

How do you make the compounding interest work for you then? By putting away money every single year, without fail. So, if a 20 year old puts away $5,000 every year, then by the time they retire they will have saved a staggering $1,932,528.09. That is enough to retire on! Here is how it happens:

• Age 20:   $5,000 x .8 percent   $5,400
• Age 21:   $10,400 x .8 percent   $11,232
• Age 22:   $16,232 x .8 percent   $17,530.56

That is how easy it is to build your investment over time using compound interest when you put money into your RRSP each year. When you do invest this way using compound interest, you need to remember three things:

• Begin the process early because the more you contribute early, the more money you can make on compound interest.
• Keep your investments regular and do not allow gaps in when you invest each year.
• Give it time to build. Do not be impatient because it is a slow process that can keep making you money if you give it the time.

Links:

Double Your Money

What Is Asset Allocation?

When You Will Be A Millionaire

How to Build an Investment Portfolio

A Dawn Journal Mutual Funds Section

What Is An ETF (Exchange Traded Funds)?

Let Your Credit Card Company Pay Your Interest

What Are Mutual Funds? Advantages and Disadvantages of Mutual Funds

The Idea of Compounding

Compound interest is something consumers hate. With compound interest, not only are you charged interest on the principle, which is the money you borrow, but you are charged interest on the interest. The interest compounds on itself, making you pay more and it is something most people could do without.

Compound interest has actually been with humanity for quite awhile, dating back 2,000 years to the days of the Roman Empire. Back then, compound interest was regarded as the worst type of usury and it was condemned under Roman law. As well, the Qur’an and the Bible both contain references to compound interest. In the Qur’an it says “O ye who believe. Devour not usury, double and quadrupling. Observe your duty to Allah, that ye may be successful.” In the Bible, there is a reference to it in Leviticus 25:36-37 which reads “Take no usury or interest from him; but fear your god, that your brother may live with you. You shall not lend him your money for usury, nor lend him your food at a profit.”

In 1613, Richard Witt wrote Arithmetical Questions, which is considered a landmark book on compound interested. Completely devoted to the subject of compound interest, it was in sharp contrast to other books because most devoted only a chapter to the concept.

Enough about the history of compound interest though, how does it work? Well, if you take out a loan that has interest compounded on a monthly basis then it will work like this:

The loan is for $1,000 and you have one percent interest per month, which means that at the end month one you owe $1,010, and at the end of the second month you owe $1,111 and so on. So, the interest from month two is being added to the principle you owe, plus the interest you owe from month one. Naturally, this can quickly get out of control, especially when you are dealing with very high interest rates.

Most people prefer to see interest as a yearly percentage and for this reason many governments force banks and other financial institutions to disclose the equivalent total interest for the year. So, for one percent interest per month, the annual percentage rate would be 12.68 percent. This prevents people from being misled into thinking they are only paying one percent interest on their principle.

Compound interest should not be confused with simple interest, which is interest that is not compounded on top of it. Sadly, simple interest is not used very often. Compound interest is used quite a bit in finance and economics and if you have a credit card, you are paying with compound interest.

It is important to look at the laws dealing with usury to ensure that you are not becoming a victim of it through compounding interest. You want to ensure that when you get a loan, you are not going to be paying interest on interest to a degree that could cause you to default on the loan itself.

More A. Dawn Articles:

Green Tea

How to Deal With Stress

How To Be An Entrepreneur

How To Take Time For Yourself

Ten Characteristics of Entrepreneurs

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Mutual Funds 101: Part 3 – Last Part

The following is an Excerpt from my first book Invest Now. Invest Now is jam-packed with timely information and timeless advice for the beginning Canadian investor. Invest Now covers a broad range of topics including Internet Scams. To purchase a copy, visit Chapters Indigo or click here to buy online - Invest Now: A Canadian’s Guide to Investing

Mutual Funds 101: Part 1
Mutual Funds 101: Part 2

What Are Fees and Expenses?

Mutual funds would be an unbeatable investment vehicle if there were no fees. But without charging fees, fund companies would not be able to give you all these options. Many financial gurus and critics would tell you to avoid mutual funds because of these fees and expenses, but I beg to differ. I think it’s better to pay fees than to lose all your money. When you buy stocks, you pay to do that-and then pay again to sell. In mutual funds, things are different. You pay your fund company every day for as long as you hold the fund. So if you calculate the cost of a thousand dollars’ worth of investments in both stocks and mutual funds for ten years, your cost for mutual funds will definitely be higher.

Let’s look at these examples:

$1000 in mutual funds:

A 3% MER would cost $1000 × 3%, which equals $30 a year.

The 10-year cost is $30 × 10, which equals $300.

$1000 in stocks:

Standard trading fees to buy = $29

Standard trading fees to sell = $29

Total cost in 10 years = $58

Buying stocks looks good in the above example—if your stocks make money. Compared to losing your money in stocks, you would not mind paying fees to buy mutual funds instead. I invest in both mutual funds and stocks. In last 10+ years, a couple of my stocks have evaporated almost overnight. I lost money in mutual funds too, but the margins were very slim. I have never lost my whole investment in mutual funds. If you know any investors, ask them how many times they lost money in stocks and how many times they lost money in mutual funds. You will get the obvious answers. Try it!

Beware of and Avoid Mutual Fund Fees and Expenses

It is time to explain the fees and expenses associated with mutual funds. An educated investor, who knows how these costs and expenses occur, should be able to reduce overall costs significantly, thus achieving higher return.

MER

This is the major cost of holding a mutual fund. MER stands for management expense ratio. The MER measures a fund’s total expenses for a financial year. A MER calculates a fund’s expenses by the fund’s average assets. The MER is expressed as a percentage of the fund’s total net assets. If you break down the MER, you will get

MER = (M + ER) × GST

The M stands for “management fees.” The M is the big chunk of the MER. This is where fund companies make money. Management fees cover compensations to dealers, sales and marketing costs, corporate expenses, portfolio-management cost, investment research cost and so on.

The ER stands for “expense ratio.” Expense ratios include administrative costs, such as regulatory costs (provincial and federal), client services and administrative costs, custodian fees, fund-reporting costs (annual report, prospectus and so on), audit and legal costs, technology costs and so on.

GST: Yes, you pay tax again when you invest your already-taxed dollars.

The MER can be found in a fund’s prospectus and on the Internet. Also, you can call your fund company to obtain the MER. It is important that your funds do not have a skyrocketing MER. Always pick a fund with a reasonable MER—not more than 2.5%. You can actually shop around for a certain type of fund and pick one with a lower MER. I will discuss index funds shortly, which have a low MER compared to regular mutual funds.

The MER Mystery

New investors will be puzzled when they do not see costs, mainly MERs, coming out of their investments up front. It’s not on your statement, not on your receipts, not on your confirmation slips … not anywhere. Does that mean that fund companies are not charging you MER fees? Are they giving you everything for free?

No, not at all. You see, fund companies came up with this brilliant way to charge you invisibly every day. The MER comes off a fund’s NAV (or net asset value—the fund’s price per unit) every day, so you don’t see it. That’s why it is important to hold a fund with a reasonable MER: in the long run, you don’t want to evaporate your money by paying a high MER. Usually, Canadian funds have a lower MER than specialty funds (which we will discuss later), and specialty funds have a higher MER than foreign funds.

Huge MER gaps can exist. A Canadian equity fund at one fund company can have a 2% MER, and the same type of Canadian equity fund at another fund company can have a 3% MER. A higher MER does not necessarily mean a higher rate of return.

Let me give you a simple example of how you pay MERs invisibly. Suppose your fund’s actual unit price is $10.05 for any given day before adding any expenses or MERs. Now your fund company will add their daily cost to $10.05 and will charge you $10.30 (assuming cost for one day is $0.25). You will never see the actual value $10.05 anywhere. Investors will see $10.30, and this is what the fund company will publish on their Web site or in the newspaper as the NAV for that day. I wish fund companies would disclose MERs visibly, but it does not look like that will happen any time soon. That’s why you absolutely must do your homework before you invest anywhere.

Loads

Mutual funds come in a confusing variety of packages: front-end load, back-end load, low load, or even no-load. Let’s clarify these.

Front-end load: When you buy this load, you pay your dealer’s commission up front. Commissions can run from 0% to 5%. If you are buying $1000 worth of funds with a 5% commission, your dealer is receiving $50, and only $950 is getting invested. With this option, you don’t pay any charges or fees when you redeem your funds. Always buy front-end funds at 0% commission, so you invest the full amount. This option is also known as initial service charge, or ISC.

Back-end load: When you buy this load, you are agreeing to stick to your fund for a few years (usually seven), and if you withdraw before passing those years, you will get hit by redemption fees. Redemption fees decline every year until they no longer exist at all. If you have always wondered why your broker or dealer always wants you to hook up with back-end funds, it’s because these funds give them a flat up-front commission (usually 5%) from the fund company. Who eventually pays this commission? It’s you. Buying back-end means you have to stick to the fund for many years, or pay redemption fees, just to compensate your fund company for that commission. Your goal is to stay away from back-end load. Back-end load is also known as rear-end load, deferred sales charge (DSC) and so on.

Low-load: This one is a kind of back-end load with reduced commitment lengths (usually three years) and reduced redemption fees as well. Also stay away from this load.

No-load: This is just a 0% version of a front-end load. But make sure the MER is not higher than other loads, in which case this is a good option.

Trailer Fees

Fund companies pay your broker or dealer trailer fees as long as you hold the fund. Trailer fees are already in the MER. Trailer fees are service commission fees, meaning your dealer or broker should keep funds on track, answer your questions, service your accounts and so on. Generally, front-end funds pay 1%, and back-end funds pay 0.5% trailer fees.

Turnover Ratio

The turnover ratio tells you how actively your fund manager is trading. Lots of trading can be expensive. The higher the turnover ratio, the more expensive the fund is. For an open account, a high turnover ratio can translate into high tax bills. You should be able to find this information in your mutual-fund prospectus.

The Prospectus: Your Mutual-Fund Bible

I have described some of the fees and expenses involved with buying a mutual fund. There might be more fees and expenses, along with other risks. A successful investor is an educated investor who researches fees, expenses, and risks. Remember, an emotional decision will not make you a successful investor. Plenty of tools out there can help you with your research, and this book will show you those tools.

The prospectus is a powerful tool that will help you a lot with your research. A prospectus is a selling document published by fund companies. By law, this has to be distributed to you as an investor. This document, which looks like a magazine, must explain a fund’s objectives, holdings, performance, risks, fees, expenses and so on. In plain words, it must provide full and true disclosure of all the important stuff you need to know to make an informed and educated decision. You can obtain this document by calling your fund company, or you can download a copy on your fund company’s Web site for free.

Always read the prospectus carefully and thoroughly. Dissect all the information it provides and then reread key information, such as risks and costs.

Miscellaneous

- Pick funds with a reasonable MER. Be extra-cautious not to pick a fund with more than a 2.5% MER. The same types of funds can have different MERs at different fund companies. If my fund company charges me a higher MER for the same kind of fund, there had better be some explanations justifying that higher MER.

- The MER is shown annually and calculated daily. The NAV you are paying for each unit already includes the MER; you do not pay the MER separately.

- The NAV, or net asset value, is what you pay for your funds. In mutual funds, you buy one unit or one share, just like one stock or one bond. The NAV equals the fund’s assets minus the fund’s liabilities. Fund companies price their funds every business day after markets close. The NAV is what you see in the newspaper or on Web sites in the Fund Prices section.

- Fund companies pay your broker, dealer, or discount brokerage trailer fees as long as you hold your funds.

The Trailer Chart

Load Type Fund Companies Pay

Front-load Up to 1% annually

Back-load Up to 0.5% annually

Low-load Pays same as back-load at

first, but later changes to front-load

• At www.sedar.com, you can find documents submitted by public companies and mutual-fund companies. You will be able to access mutual fund prospectuses, annual reports, financial statements and so on. This is a good place to start your research. Check this site whenever you need to look for a document and you don’t want to wait for the paper version to arrive in the mail.

Links:

What Is Asset Allocation?

Different Types Of Mutual Funds

A Dawn Journal Mutual Funds Section

How to Build an Investment Portfolio

What Is An ETF (Exchange Traded Funds)?

Is A Dawn Journal The Best Personal Finance Blog?

What Are Mutual Funds? Advantages and Disadvantages of Mutual Funds

Mutual Funds 101: Part 2

The following is an Excerpt from my first book Invest Now. Invest Now is jam-packed with timely information and timeless advice for the beginning Canadian investor. Invest Now covers a broad range of topics including Internet Scams. To purchase a copy, visit Chapters Indigo or click here to buy online - Invest Now: A Canadian’s Guide to Investing

Mutual Funds 101: Part 1

Types of Mutual Funds

Open-End and Closed-End Funds

Before I describe the different types of funds, you need to know about open-end and closed-end funds. Most of the funds investors deal with are open-end funds. Open-end funds have unlimited units to sell and buy, as long as the fund manager is not closing or capping the fund. Closed-end funds have fixed numbers of units and trade on a stock exchange, just like stocks. An example would be the DDJ High Yield Fund, which trades on the Toronto Stock Exchange under HYB.UN.

These days, mutual funds are a hot commodity. Roughly 11,000 funds are available in North America. In other words, funds outnumber stocks.

In the basic level, there are three types of funds.

1. Equity funds

2. Income funds

3. Money-market funds

Your portfolio must include both equity funds and income funds. Shortly, I will show you my model portfolio to help you build your own. I will not include any money-market funds in my model portfolios, as money-market funds are just like interest-paying savings accounts. First-time investors should not be investing just to collect interest.

If you would like to follow a more conservative approach, you can add 5%-10% money-market funds into your portfolio.

Now, let me explain these three types. We will start with equity funds.

Equity Funds

As the name says, equity funds are made of equities, or stocks. Just as there are different types of equities, there are different types of equity funds. Fund managers can choose value or growth styles to manage equity funds (these styles are varied along a spectrum, but I will stick to the basics). Growth-fund managers pick the fastest-growing and often well-known companies to earn an above-average return. Growth managers will not care about stock price; they are willing to pay higher prices. Growth funds tend to be volatile. Value managers are looking for value or stocks that are trading at lower than their real value. Value funds are conservative funds that typically carry less risk than growth funds. Value managers hope to make profit from capital appreciation (meaning the profit will be made by selling stocks when they go higher).

Income Funds

Income funds are also known as fixed-income funds or bond funds. These funds are designed to give you a steady stream of income to diversify your portfolio. Income funds are supposed to give you more income than savings accounts or GICs. Like any investment, income funds are not risk-free. Senior and conservative investors tend to like income funds more than other investors.

Money-Market Funds

Money-market funds are like savings accounts that pay high interest. The unit value does not fluctuate, and the fund pays a monthly dividend or interest. Money-market funds should only be used to park money for a few days.

Some Other Types

Let’s briefly examine the following types of funds, just to give you an idea.

Ethical funds: These funds will not invest in companies that deal with alcohol, tobacco, weapons, environmental pollution, the injuring of animals and so on. In Canada, not many fund companies offer ethical funds.

Sector funds: These are industry-specific funds-such as telecommunications, health science, biotechnology and so on. These funds can give you higher rate of return if your sector does well, but also can take a nose-dive if your sector tanks.

Regional funds: These funds are concentrated in specific regions, like the Pacific region, an emerging-market region, the Eastern European region, the Asian region and so on. Like sector funds, these funds can be risky and have higher MERs.

Segregated funds: This chapter would be incomplete without a discussion of these funds. A segregated fund is a mutual fund with an insurance wrapper; you can call it a hybrid fund. This type of fund offers the growth potential of a mutual fund plus some insurance protection features. Usually insurance protection guarantees your capital up to 100% at death and at maturity. To benefit, you have to either die or stick to your funds for ten or more years. This confuses investors. If you redeem your funds before ten years, there are no guarantees, and if markets perform badly, you will be losing your money in addition to paying a high MER. Segregated funds offer many other added features, but I will not discuss those, as there is no point in paying a high MER for features that won’t exist for a decade. In the long run, holding segregated funds can cost you hefty fees, dragging down the rate of return. If you are that sensitive about money and need insurance features to protect your money, maybe you should avoid investing altogether. Let me give you an example of how MERs can vary between the two same funds.

CI Global Fund: 2.36% MER

CI Global GIF Class A Fund: 4.68% MER

(MER Source: CI’s Web site at www.ci.com)

Specialty funds: Many fancy funds exist: hedge funds, labour-sponsored funds, institutional managed funds, fee-based wrap funds, and so many more. Remember one thing: these fancy funds charge you fancy fees . and at the end, they empty your pockets. Stick to simple funds with low MERs or to plain index funds. I really like index funds and have dedicated an entire chapter to them.

Miscellaneous

• “Portfolio” refers to the main account under which you hold all your investment products. If you hold stocks, bonds, and mutual funds in one place, you can say you hold these in your portfolio.
• An annual report is different from a prospectus. You will find your fund’s holdings (all of them, including stocks, bonds, T-bills and so on) and financial statements in an annual report. The annual report gives you some other important information as well. It’s a good idea to check both the annual report and the prospectus.
• Young and aggressive investors tend to like equity funds more than other investors.
• Mutual funds can be categorized by the market capitalization of the stocks. Small-cap funds hold small-cap stocks. Small-cap companies have a market capitalization of less than 500 million dollars. Mid-cap funds hold mid-cap stocks. Mid-cap companies have a market-capitalization of 500 million to 5 billion dollars. Large-cap funds hold large-cap stock. Large-cap companies have a market capitalization of over 5 billion dollars.
• Balanced funds are just a blend of equity and income funds (typically 60% equity and 40% income). These funds are supposed to balance capital appreciation, income and safety.
• A global fund invests throughout the world, including in your own country. An international fund invests internationally, excluding your own country. In Canada, global funds hold a good portion of U.S. stocks, but international funds do not.
• The term “segregated” refers to the insurance companies’ need to keep segregated-funds assets separated from their other products’ assets.

Links:

A Dawn Journal Mutual Funds Section

What Is Asset Allocation?

How to Build an Investment Portfolio

What Is An ETF (Exchange Traded Funds)?

What Are Mutual Funds? Advantages and Disadvantages of Mutual Funds

Mutual Funds 101: Part 1

Mutual Funds 101: Part 2

The following is an Excerpt from my first book Invest Now. Invest Now is jam-packed with timely information and timeless advice for the beginning Canadian investor. Invest Now covers a broad range of topics including Internet Scams. To purchase a copy, visit Chapters Indigo or click here to buy online - Invest Now: A Canadian’s Guide to Investing

Mutual Funds: The First-Time Investor’s Friend

If you had a friend who was very knowledgeable in the stock market, you would definitely want him to manage your stock investments. What if this friend agreed to do everything for a small fee? Wouldn’t you hire him? A mutual fund is just like this hypothetical friend. A mutual fund is a collection of investment products, such as stocks, bonds, T-bills, and so on. Mutual fund companies collect money from investors and hire professionals to manage your money. These professionals are called fund managers. When you buy a mutual fund, you buy a portion of the fund (or a portion of what the funds hold altogether).

Why Are Mutual Funds Suitable for First-Time Investors?

You need years of experience, lots of money, intensive knowledge, and various tools to pick an individual stock. A mutual fund does all that for you while keeping risk to a minimum. It’s no wonder that mutual funds’ assets are skyrocketing with the speed of a space shuttle.

To pick the most suitable funds for you, you need to know a few things. Let me start with the advantages of mutual funds; you can use these advantages to overcome obstacles you will face as a first-time investor.

Advantages of Mutual Funds

Low Minimums and PAC

Low minimums are the best feature mutual funds offer. Have you heard your friends saying they don’t have enough money to invest, and that’s why they never save? If you are using same excuse, put it aside. Most mutual funds will let you start with as little as $500, and some will let you start with just $100. If you agree to let fund companies take money out of your bank account systematically—either monthly, weekly, biweekly, quarterly, semi-annually or annually, you can start with as little as $25. This convenient option is a good one for those who can’t put in one lump-sum payment to start with. You will not find this type of convenience investing in stocks and bonds. The above-mentioned feature is called PAC (pre-authorized checking), AIP (automatic investment plan) or SIP (systematic investment plan). I will use PAC in this book, because PAC is widely used and recognized.

PAC is nothing but systematically investing your money with a financial institution. One great advantage of having PAC is that it gives you the power of dollar-cost averaging.

Dollar-cost average simply refers to the averaging of your cost per share or per unit. Suppose you are running a PAC for $25 monthly on the 15th of each month. Your mutual fund unit price will not be the same on the 15th of each month. But you will be adding the same $25 each month. If unit price goes up, you will be buying fewer units. If unit price goes down, you will be buying more units. Running a PAC year after year and calculating your average cost per share after a few years will prompt gains. Research has shown that if you do dollar-cost averaging, you end up buying more units rather than spending one set lump sum.

Dollar-cost averaging on stocks or bonds will cost you a lot of money, with transaction fees every time you buy. But you can do a dollar-cost average on mutual funds without additional cost or transaction fees. Just run a PAC, and you are good to go. This feature is very suitable for first-time investors.

Professional Management

Choosing an individual stock or bond can be an enormous task for new investors. All the research and decision-making can be daunting. Everyday investors don’t have the tools or resources to make a prudent decision. When you buy mutual funds, you are buying the expertise and service of the group of professionals who manage those funds. Each group consists of a fund manager and a few analysts. This group is responsible for doing all the research and for deciding when and what to buy and sell. Basically, everything is done by the fund manager and his team. You don’t have to spend days and nights analyzing stocks and monitoring your portfolio. Remember, these professionals cost you money, but I will discuss how to keep your costs minimal.

Diversification and Convenience

Whether you are a stock or a mutual-fund investor, it is very important to diversify. The old saying “Don’t put all your eggs in one basket” still applies. Diversification reduces your risk by spreading your money across different companies, countries and types of assets. A mutual fund is lot more diversified than a stock or a bond, because a typical fund holds 20 to 50 stocks or a mixture of stocks, bonds, T-bills and so on. I will share my own simple diversification strategy a little later.

Diversification can be a headache if you invest in stocks or bonds. You need to do lots of trading, and you have to keep track all of your portfolios constantly. If you don’t mind the complex task of managing your own portfolio and enjoy doing it, that’s fine. But such an endeavour would require a lot of effort for first-time investors as they pick different types of investment products and attempt to manage them. A mutual fund gives you exposure throughout the world with diversification and convenience—nothing needed from your side.

Regulation

When I first started investing, a junior mining company’s stock was going through the roof. This ten-cent stock was trading at close to two dollars, and rumour was it would reach five dollars soon. I started dreaming of becoming a millionaire in couple of weeks and had already made some plans to retire in the Bahamas the next month.

My emotions ran high; I did not hesitate to invest a few thousand dollars. My investment went up for one day. Starting the second day, my investment started to fall, and after one week my investment was down to four hundred dollars. Basically, I lost all my money. In a mutual fund, it is unlikely that you will lose your money overnight. In the financial world, nothing is guaranteed, but a mutual fund offers a better degree of protection than stocks due to stringent rules and regulations. Mutual funds are highly regulated, ensuring how funds are managed and how investors are informed.

A few points on mutual funds are worth mentioning

A mutual-fund company does not physically hold its assets. A third party, called the custodian, holds securities on behalf of the fund company. If the fund company is in trouble, your money is protected. Fund managers can’t just walk out with your money. The custodian can be either a bank or a trust company.

Fund companies need approval from unit holders to make any significant change. Also, any change in the fund’s investment objective has to be approved by unit holders.

Fund companies have to disclose the fund’s holdings on a regular basis.

Fund companies have to disclose the fund’s unit value regularly.

Fund companies need to publish procedures for the purchase and sale of funds.

Remember, these rules are in place to provide you some degree of safety. No investment is guaranteed, and any investment can decline in value.

Liquidity

Mutual funds are very easy to sell and buy. Your money is not tied up for any specified terms or years. Keep in mind that, except for money-market funds, you will incur an early redemption fee if you redeem your fund within the first sixty days of purchase. Consult your mutual-fund prospectus to find out more.

Transaction Cost

Mutual funds offer another convenient feature. Suppose you want to buy a few Canadian stocks and a couple of international stocks to start your investment. You will be spending the following if you are buying stocks:

(Assume trading cost per transaction is $29)

Three Canadian stocks trading on TSX = 3 × $29 = $87 CAD

Two American stocks trading on NYSE = 2 × $29 = $58 US

Imagine your cost in buying on the European and Asian exchanges. Selling would be equally expensive. You can avoid all these costs if you buy mutual funds. However, you do pay on mutual funds, and I will explain how in a moment.

Disadvantages of Mutual Funds

Nothing in life comes without disadvantages. Now that we have discussed the pros of mutual funds, let’s go over the cons.

Fees and Expenses

When you buy mutual funds, you pay fees to compensate companies for doing all the work. These fees are called management-expense ratios (MERs). Depending on what type of load (front load, back load or low load) you buy, you might pay commission and redemption fees. I will discuss MERs and load a little later in order to show you how to keep your cost minimal.

No Insurance

The Canadian Deposit Insurance Corporation (CDIC) does not insure mutual funds the way it insures bank accounts, loans and so on. Keep in mind that other investments, such as stocks or bonds, are not insured by the CDIC either.

Loss of Controls

Fund managers, not mutual fund holders, make the decisions on a fund’s portfolio. When you buy mutual funds, you give up your authority and abide by the fund company’s decisions.

Trading Limitations

Stocks can be traded as many times as you want throughout the day (North American markets are open from 9:30 a.m. to 4:00 p.m., Monday through Friday). Mutual funds are priced only once a day, after the markets close. Regardless of how many times you buy or sell in a day, you will get only one price for that day. It does not change every second, like stocks.

Cash Holding

Mutual funds need to hold large amounts of cash to pay for redemptions (when someone is selling). Had this cash been invested, you would have made money on this cash. In other words, investors lose growth potential on that cash portion.

Mutual funds carry some other disadvantages, but these are the most important ones.

Next, let’s discuss the fees and expenses you pay when you buy mutual funds. Fees and expenses are very important to know, as such information allows you to cut costs by investing carefully. You need to do that to become a successful investor.

Links:

What Is Asset Allocation?

How to Build an Investment Portfolio

What Is An ETF (Exchange Traded Funds)?

Gold History

Gold has had an immense impact on humanity. It has caused the fall of nations, pushed the Age of Discovery, made some men rich and others poor. It is something that we all cherish and we all want more of it. It has a bloody history at times and as Led Zeppelin once said, all that glitters is not gold. Gold is amazing, beautiful and valuable but it is also something that has helped to drive our civilization in various good and bad directions.

Archaeologists have dated gold artefacts to as far back as 4,000 BC in the Balkans but most estimates of when gold began to be used by artisans goes back a few thousand years further than that. Various items like golden hats and the Nebra disk have been found in Central Europe since around 3,000 BC.

The Ancient Egyptians were in love with gold and gold was quite common around the Nile. King Tushratta of Mitanni said that gold was more plentiful than dirt in Egypt and it was in Egypt where the first gold production and mining began. Even the world’s oldest map shows a plan for a gold mine in it, proving the power gold has had on our civilization for the past few thousand years. The Egyptians would get gold through methods like fire-setting and they set up gold mines all along the Red Sea in the current location of Saudi Arabia.

Gold was mentioned within the Bible several times, including in the Book of Revelations where New Jerusalem is described as a city where the streets are made of pure gold. Gold began to appear in more than decorative items by the sixth and fifth century BC, especially in China where a square gold coin was issued. While the Egyptians may have been the first to mine gold, the Romans were the ones who really turned it into a mass-production method. Using hydraulic mining methods in Spain from 25 BC onwards and in Romania from 150 AD onwards, the Romans mined vast amounts of gold from the Earth. One of the largest mines that the Romans had was at Las Medulas in Spain, where seven aqueducts fed water into the mine to help the Romans get at the gold.

Over 1,000 years later, the European exploration of the Americas would be fueled by the quest for gold. Gold was very common in South and Central America, so much so that the Aztec called gold “god excrement” because it was a product of the gods. Sadly, the large amount of gold and the gifts of gold for the Spanish conquistadors only fuelled their lust for more. Gold was a big reason why the Aztec Empire fell and if it was not for gold, world history may have been very different.

In the 19^th century, various gold rushes helped create some of the most famous cities in the world including San Francisco.

These days, while platinum metals are usually worth more than gold, it is still widely regarded as the most desirable of precious metals. For centuries it was the standard of currencies around the world and even today it is the symbol of purity, royalty and prestige.

Today, gold is mined on an incredible scale and 75 percent of all the gold ever produced was extracted in the past 100 years. Gold is so valuable that much of the gold mined throughout history is still in use, simply recast into different shapes and products by subsequent generations.

It is estimated that some 170,000 tons of gold are now available above ground and if we were to take all the gold ever refined it would form a cube that is only 66 feet on each side.

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Exchange-Traded Funds (ETF)

What Is An ETF?

An ETF is a type of investment product that trades on an exchange like a stock. However, unlike a stock an ETF is not made of a single entity. An ETF is made of a group of investments. These groups can be a group of stock, bonds, natural resources, commodities, precious metals, etc. In most cases, an ETF follows an Index, as an Index is already made of a group of stock (or other investment products).

Advantages of ETFs

Lower Cost – The ongoing cost of holding ETFs (called Management Expenses Ratio or MER) is lower than mutual funds or index funds. For example, An ETF MER can be in the range of 0.25% – 1.00%; a mutual fund or an index fund MER can run in the range of 1.00% – 3.50%.

Flexibility – ETFs offer more flexibility as they trade on the stock exchange and can be bought or sold throughout the day during regular trading hours. Mutual funds do not offer this option, as they can be transacted using the NAV (Net Asset Value) which comes out at the end of the day.

Diversification - As ETFs are made of a basket of varieties of investments, they provide broad diversification and convenience. It would be time consuming, a lot of hassle, and almost impossible to get the same level of diversification with anything else.

You See What You Get – A major advantage of holding ETFs is that at least you get the return of the underlying index the ETF is tracking. You know what you are getting and you see what you get. With mutual funds, it is totally different. In general, regular mutual funds are made of many individual stocks (or other types of investment products) and most of the time you will have a hard time seeing what you are getting.

Tax Advantage – Tax liabilities are created when trading occurs in the fund. Active fund managers are always buying and selling securities in regular mutual funds. When you sell your mutual funds, fund managers have to sell securities to provide you with cash for your sell. However, this is not the case when you sell your ETFs. When you sell your ETFs, trading can occur between other ETF units holders (in-kind trade) – triggering no capital gain. This means ETFs do not need frequent trading to pay an investor who wants to redeem his part. Less trading creates less tax liability and thus, minimal to none capital gains. However, ETFs do need to trade occasionally. This type of trading occurs when index changes (as they are tracking index).

Easier Asset Allocation – ETFs let you easily manage asset allocation as you are able to see your entire ETFs in one place (your trading account) and thus track and manage asset allocation easily.

Low Maintenance – ETFs allow you to hold a broad range of indexes with minimal supervision. Studies show that experienced ETF investors beat most professional fund managers with a fraction of time and effort spent.

Disadvantages of ETFs

Requires Investment Knowledge - Buying ETFs is not as easy as mutual funds. You need to have a trading account and need to be some sort of investment savvy to hold ETFs.

Brokerage Fees – Buying ETFs incur brokerage commission or trading fees – just like stock, you pay fees to buy and to see. This makes buying ETFs for smaller amounts not justifiable.

No Dollar-Cost-Averaging – Since ETFs incur fees each time and buy and sell, it’s not a good vehicle for dollar cost averaging.

Market Timing – Since ETFs are easy to trade, it may tempt investors to do market timing (buy and sell to chase returns) via frequent trading and thus incurring a lots of transaction fees. ETFs work best for long time investors.

How ETFs Choose Its Holdings or Products

ETFs mainly use two methods to pick its holdings. These are called: Market-capitalization /Cap-weighted indexing and fundamental indexing.

Market-capitalization /Cap-weighted indexing replicates a market as-is. In this methodology, bigger companies have greater influence. Most common indexes such as the S&P/TSX Composite and the S&P 500 use this method. In Canada iShares and in the U.S. Vanguard use this method to operate many equity ETFs.

Fundamental indexing picks stocks by looking at fundamentals (such as earnings, book value, sales, dividends etc), not by size. Fundamental indexing proponents argue that Market-capitalization /Cap-weighted indexing overvalues larger and undervalues smaller equities. So to get true value, stocks’ fundamentals, not sizes should be looked at.

There are other methodologies such as price-weighted indexing, equal- weighted indexing, etc. If you are looking for the best indexing, there is no clear answer. You need to do a little research to find the best one that suits your needs. If you are looking for the cheapest one, Market-capitalization /Cap-weighted ETFs are usually the winner.

How to Buy or Sell ETFs

Since ETFs trade on exchanges, you need a trading account (discount brokerage account) to buy ETFs; just the same way you would buy stocks. In Invest Now, I have mentioned how to open a trading account at an ease.

Are There Any ETFs In Canada?

Canada is the country that invented ETF. |The world’s first ETF traded on the Toronto Stock Exchange in March 1990. Here are some ETF providers in Canada:

iShares Canada – The oldest and largest ETF provider in Canada.

Horizons – Horizons offers AlphaPro and betaPro ETFs. Horizons AlphaPro is the only ETF family that is actively managed ETF in Canada. Horizons BetaPro offers leveraged and inverse leveraged ETFs to profit in both bull and bear markets.

Claymore ETFs – Claymore offers various innovative intelligent investment strategies ETFs. This is the only company that offers ETFs that can do DRIPs (dividend reinvestment plan) in Canada.

BMO Exchange Traded Funds – New player in the ETF markets and the only major Canadian financial group to offer ETFs.

TMXMoney has a section on Exchange Traded Funds and I strongly encourage you to visit it.

How to Build an ETF Portfolio

I recommend you read these two articles I wrote.

How to Build an Investment Portfolio

What Is Asset Allocation?

A Dawn Portfolio (I am still working on this project and will add a link once done)

Once you are finished reading, do some more research and do some more reading from various other sources to have a good grasp of ETF. And then, if you are confident enough, construct a suitable portfolio that fits your needs. If you are not comfortable figuring out on your own, seek help from professional financial advisors.

NB – Currently, I do not have any articles giving ETF ideas, examples of Indices ETFs track and so on. I will be writing more on these in the future.

How Risky Are ETFs?

No investments come without risk (except some fixed income products like money market instruments, T – Bills, etc). However, due to the fact that ETFs provide a broad diversification with a wide variety of investments, you may be able to reduce some risk.

Last Word

As I mentioned in Invest Now, investment is an art. As such, it requires discipline, hard work and consistency. Do not blindly follow any ETF model portfolios or tools just because it looks cool. You are different than anyone else – make an educated decision based on your time horizon, risk tolerance, financial goals, and your overall financial situation.

More Articles:

What Is Asset Allocation?

How to Build an Investment Portfolio

Real Return Bonds (RRB) and Treasury Inflation-Protected Securities (TIPS)

How to Create an Investment Portfolio

What Is An Investment Portfolio?

An investment portfolio is nothing but your collection of investments. You can hold a wide range of investments such as stocks, bonds, money market instruments, and so on in your portfolio. The objective of building a portfolio is to minimize risks and maximize return by diversify it among variety of investments. Diversification can be made within same asset class or across different asset classes. Research has shown that a diversified portfolio spreading across different classes always is the key to build a successful portfolio.

What I Need To Consider Before Building A Portfolio?

There are various factors you should consider before start building a portfolio. These factors are:

- Your time horizon
- Your risk Tolerance
- Your investment objects etc
I discussed about these in another article. Please follow this link to read it – What Is Asset Allocation?

Are There Any General Rules of Thumb Building An Investment Portfolio?

There are too many, actually. I would have to say, the most common rule is the 100 – age rule. This is simply getting the percentage of stocks and bonds you should hold by subtracting your age from 100. For example, if you are 30, you should hold (100 – 30) 70 per cent stocks and 30 per cent bonds. As you grow older, you should be reducing your stock portion according to this rule. When you are 60, you should be holding 40 per cent stocks and 60 per cent bonds.

Another simple portfolio building approach is the Neutral Allocation – which is holding 60 per cent stocks and 40 per cent bonds. Two other portfolios worth mentioning are Lazy man or couch potato portfolios by Scott Burns and The Permanent Portfolio by Harry Browne.

To find many other portfolio ideas, do a search by entering these keyword phrases: “investment portfolio mix,” “portfolio asset allocations tools,” “model investment portfolio,”etc.

Do You Have Your Own Investment Model Portfolio?

Yes, to make investing simple and worry-free, I have been invented a model portfolio called “A Dawn Portfolio” or simply ADP. You can read more about ADP here – (I am still working on this project and will add a link once done)

To find many other online asset allocation calculators, do a search by entering these keyword phrases: “asset allocation calculators,” “portfolio asset allocations tools,” etc

Last Word

Of course, you need to decide if the recommended allocations match with your personal risk tolerance and market views. Investments must be considered in context

If you are at all interested in asset allocation strategies, I strongly recommend that you read about the science. Don’t just follow conventional thinking and rules of thumb.

More Articles:

What Is Asset Allocation?

Real Return Bonds (RRB) and Treasury Inflation-Protected Securities (TIPS)

Asset Allocation, Diversification, and Your Portfolio

Asset allocation is an investment strategy which simply entails allocating your assets (your investment portfolio) among different categories of investments, such as stocks, bonds, money market funds, cash etc. Asset allocation helps to minimize risks and maximize gains because it diversifies your portfolio among various types of investment or investment products instead of keeping them in one place.

What Types of Asset Allocation Will Work Best For Me?

Although there are many rules of thumb regarding asset allocation, no one can tell you exactly which one is right or which one is wrong for you – as this is a very personal matter which largely depends on various factors as described below:

• Time Horizon: Time horizon is how much time you have ahead of you to invest in reaching your financial goals. An investor with a longer time horizon has time on his side and will be able to choose volatile or riskier products for maximum returns – because if markets go down, this investor can wait to ride out the volatility. On the other hand, an investor with shorter time horizon will not be able to afford risky product, as he will not have the luxury to wait for the market to go up if he falls into financial meltdown.
• Risk Tolerance: Risk tolerance is your ability to take risks for better returns. In the investment world, risk and reward are inextricably entwined. If you are young (like in your 20s or 30s), you may not care that much about losing 35% of your value, as you know you have a long way to go. But when you are in your 40s or 50s, with kids’ education and retirement in mind, a 20% drop in your portfolio may be enough to lose sleep at night.
• Investing Is An Ongoing Learning Process: In my book Invest Now, I have mentioned that investment is nothing but a discipline, and it has to be orchestrated with great passion and care. Investment is not like going to the shopping mall and buying a few things impulsively – it is a lifelong learning process. Asset allocation or any other investment ideas are not set in stone and these will change as time changes. Always upgrade yourself with financial changes in the broad global perspective and you will have to change your investment strategies to bridge the gap between the present and the future.
• Individuality Counts: Although you will find there are many rules of thumb or pre-made portfolios when it comes to asset allocation, there is no single allocation or portfolio available that will be right for everyone. Everyone is different and so should be their asset allocation. The onus is on you to find out the best asset allocation that suits your needs.

What Are Some Major Asset Categories?

These days, a wide array of investment products exist to give you a wide range of asset allocation with a broad diversification. However, there are only three major asset categories I will mention here:

• Equities or Stocks: The word “stock” is interchangeable with “share,” “equity,” “security” and so on. Stocks represent ownership in a company and historically offer the greatest risk and highest returns among other asset groups mentioned here. Stocks should not be used as a short term investment as it can be very volatile to hold for a short period of time.
• Fixed Income Investments or Bonds: Some other fixed income investment products are government savings bonds, bond mutual funds, etc. These types of products are less volatile than equities and offer modest returns as well. Fixed income products can offer steady flow of income – depending on its objective.
• Cash Equivalents or Cash: This can be plain cash or products like savings accounts, money market funds, treasury bills, etc. These are considered the safest investments with minimal returns with almost no risks.

Why Asset Allocation Works?

Due to economic and market conditions, no one can predict the best performing assets and it varies year to year. Time has proved that during bad and good economic times, all asset classes do not move in the same direction. By diversifying your assets among various categories, you are minimizing your risks. If one asset class goes down, the other asset class is there to protect you by averaging out. Also, to reach your financial goals, you need to balance your portfolio by keeping both high-return and low-return investment products. If you keep only one type of product in your portfolio, you may never be able to reach your investment objectives – as it will be either too risky or too safe. Asset allocation helps you to diversify and balance your portfolio.

What Are Some Common Asset Allocation Rules of Thumb?

There are so many rules of thumb on this topic that it can be overwhelming. Many consider a neutral asset allocation should be 60% stocks and 40% bonds. Another rule of thumb goes like: subtract your age from 100 and you will get the percentage to hold in stocks. For example, if you are 40, 100-40 = 60% of your portfolio should be in stocks and 40% should be in bonds.

Is Diversification Same As Asset Allocation?

The old saying “Don’t put all your eggs in one basket” was good advice 100 years ago, and it will be good advice forever. Whether you are a first-time or a veteran investor, you always need to spread out your investments to minimize your risks. Diversification refers to the process of spreading investments among various equities. Asset allocation refers to the process of spreading investments beyond multiple equities and over several asset classes such equities, bonds, cash, etc.

Asset Allocation is a diversification strategy that helps you to offset decline in any particular asset classes by gains in other asset classes – thus reducing the fluctuations of performance of a portfolio. It is unlikely that all asset classes will go downhill at the same time.

Do You Have Your Own Asset Allocation Model Portfolio?

Yes, to make investing simple and worry-free, I have invented a model portfolio called “A Dawn Timeless Portfolio” or simply ADTP. You can read more about ADTP here – (I am still working on this project and will add a link once done)

To find many other online asset allocation calculators, do a search by entering these keyword phrases: “asset allocation calculators,” “portfolio asset allocations tools,” etc.

Last Word

Model portfolios and asset allocation tools are to help you understand asset allocation. Do not blindly follow any model portfolios or tools just because it looks cool. You are different than anyone else – make an educated decision based on your time horizon, risk tolerance, financial goals, and your overall financial situation.

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