Tag Archives: indexing

The trouble with core-and-explore

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Robb Engen, Boomer & Echo

By Robb Engen, Boomer & Echo

Special to the Financial Independence Hub

We all know how the story goes: You get a hot stock tip from your uncle who works in the oil & gas industry, or from your brother-in-law who works in the tech space, or from your mortgage broker (who’s an idiot).

I’m sorry, but just stop right there. No, Tiger Mike’s Drilling Co. is NOT going to be the next Suncor, and Flappy Bird (or whatever the kids are playing these days) is definitely not going to be the next Facebook or Instagram. And your mortgage broker is still an idiot, no matter what his day-trading recommendation was this time. So why are you listening to him?

Many investors obsess over fees, trying to shave tenths or even hundredths of a percentage from their mutual fund or ETF expenses. But some investors are willing to throw away those benefits by trying (and failing) to hit a home run picking junior mining stocks on the Venture Exchange.

“Play money” doesn’t belong in your retirement plan

The problem with a core-and-explore approach is when investors view “explore” as play money to gamble on risky penny stocks or the next up-and-coming trend. Was it play money when you first decided to save instead of spend your hard-earned dollars? Why is it different now that the money is in your brokerage account?

Why take that kind of risk with your investments? If you feel like gambling, go to a casino. “Play money” does not belong in your retirement plan.

I get it – it can be fun to try and find the next Microsoft or Google from a list of up-and-comers. But the odds of that happening are overwhelmingly not in your favour.

There’s a reason why most “hot stock tip” stories end up as cautionary tales for investors. So why do we keep doing it?

Remember, you don’t need to swing for the fences when a base hit will do just fine.

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site [note the comments that follow it] and is republished here with his permission. 

Robb Engen, you’re no longer alone in being a 100% “pure” indexer

 

By Jonathan Chevreau

Here’s my latest MoneySense blog, which is a followup to Robb Engen’s article here at the Hub about his conversion from stock-picking to 100% “pure” indexing.

After Robb revealed his “conversion” and I appealed for other readers with similar stories, readers started to come out of the woodwork. In one of the cases, the “confession” appeared first at MoneySense and now The Hub.

In addition to the two readers profiled in the MoneySense blog, I’ve already started to receive more emails from other “pure” readers. Please let me know by emailing me at jonathan@findependence.com. Hopefully, we’ll discover that there are a lot more than the half dozen I’m so far aware of.

I’ve republished the original version of the blog below and included photographs of the two readers that were not included in the MoneySense version:

Pure indexers step forward

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Boomer & Echo’s Robb Engen

Early in January, popular blogger and fee-only financial planner Robb Engen announced on Twitter and his Boomer & Echo site that he had finally bitten the bullet – he’d liquidated his portfolio of individual dividend-paying stocks in order to become a 100% “pure” indexer. Continue Reading…

Why Boomer & Echo’s Robb Engen dumped stocks to be 100% an indexer

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Robb Engen, Boomer & Echo

By Robb Engen, Boomer & Echo

Special to the Financial Independence Hub

For a while now I’ve dithered over when to sell my portfolio of dividend stocks and implement my two-fund ETF solution.  The tanking stock market didn’t help – particularly with oil and gas stocks plummeting and a few of my holdings underwater.  Behaviourally, I badly wanted to wait until oil prices recovered so I didn’t have to sell those stocks at a loss.

But last Thursday I finally took the plunge and sold 24 dividend stocks, worth roughly $100,000, and immediately replaced them with two ETFs from Vanguard.  I’m not going to lie; it was hard to sell my babies:

Continue Reading…

How Behavioural Biases Stopped Me from Becoming an Indexer

We’re delighted to run the first of what we hope will be many contributions from the popular Boomer & Echo blog.  The topic is something I suspect many investors can relate to if they have an intellectual understanding of the powerful reason for indexing but are unable to fully commit to it because of the behavioural biases Robb Engen so eloquently describes. Robb is the “Echo” part of Boomer & Echo and you can read all about him here.  The piece originally ran in September. Link to the original is below.

robb-engenBy Robb Engen, Boomer & Echo

Special to the Financial Independence Hub

I’ve spent the last five years convincing myself – and many of you – that I’m a sophisticated do-it-yourself investor with a sound strategy that will outperform the market over the long run.

My dividend growth investment approach has indeed performed well, returning over 16% per year since 2009. But the stock market in general has also been red hot over that time. It’ll take another bear market cycle to determine whether my investment returns were skill, luck, or something in between.

In the meantime, since launching our fee-only planning business earlier this year, I’ve been recommending a couch potato investment approach to anyone who’ll listen. I truly believe that 99% of investors would be better off indexing their portfolio with three or four low cost, broadly diversified ETFs.

Related: Why investors should embrace simple solutions

So lately I’ve started to wonder, what makes my situation so special? Why stick with a strategy that I don’t even recommend to my clients?

The answer lies in a whole bunch of hidden behavioural biases that cloud my judgement – framing, recency bias, home country bias, and overconfidence.

Framing

It’s difficult to part ways with a successful investing approach.  Selling a portfolio of winning stocks – my babies that I’ve nurtured through this five-year bull market – just doesn’t feel right. But if I were sitting on $100,000 in cash instead of stocks I’d have no problem starting a couch potato portfolio today.

Recency bias

As the bull market rages on and my investments continue to perform well, it gets harder and harder to recall what a bear market feels like and what I might do if my investment returns start to lag my benchmark.

Related: How are your investments performing?

This year my portfolio has trailed its benchmark by about one per cent – not huge, but enough to make me pause and reconsider my approach.

Home country bias

When I started my DIY portfolio, I bought the 10 highest yielding stocks on the TSX. While I’ve refined my stock-picking approach since then, I’ve stuck with Canadian dividend payers even though Canadian firms make up a tiny slice of the global economy.

Making matters worse, instead of keeping my Canadian dividend stocks in a TFSA or non-registered account, they’re held inside my RRSP. Not an optimal strategy when it comes to tax efficiency.

Overconfidence

It’s hard not to be overconfident when you’ve beaten your benchmark by a full 3% per year over the last five years. But even the best investors will eventually suffer periods of underperformance.

Related: 5 lessons learned about investing

Why wait for that to happen before accepting the inevitable? Indexing gives me the best chance of achieving my investment goals over the very long term.

No shame in becoming an indexer

Norm Rothery had a great piece in the Globe and Mail in mid-September about a DIY investor whose U.S. stock picks had under-performed the market by a good 3% per year since 2007. The investor decided to stop picking U.S. stocks and move to index funds instead – opting for Vanguard’s FTSE All-World ex Canada ETF (VXC) to get his U.S. exposure.

Rothery goes on to write:

Scott’s decision to stop picking U.S. stocks is an uncommon one. Most self-directed investors remain far too confident in their abilities for far too long. Instead, disappointing long-term results are often attributed to misfortune or peculiar circumstances rather than the lack of a competitive edge.

There is no shame in admitting that you’re not the next Warren Buffett. The vast majority of investors aren’t. Those who figure it out are likely to improve their returns dramatically by following simple low-cost mechanical methods such as investing in low-fee index funds.”

Speaking of Buffett, the ‘Oracle of Omaha’ has famously touted the benefits of a low cost, broadly diversified investment approach, saying that most investors would be better off in an index fund rather than trying to beat the market by picking stocks or actively managed mutual funds.

Final thoughts

The more I read about, write about, and teach others about investing, the more I’m convinced that passive investing is the right approach.

It’s not that I stopped believing in a dividend growth strategy – it’s a fine approach that many investors will have success with – but it’s not ideal for my RRSP.  And frankly, the time and effort needed to manage it properly may not be worth it in the long run.

I suspect it’s only a matter of time before I pull the trigger and become a full-fledged indexer.

Robb Engen is a fee-only planner and personal finance blogger at Boomer & Echo. He lives in Lethbridge, Alberta with his wife and two children.

This article  originally ran in September of this year.  Even if you read the Hub’s version above, it’s worth clicking through to the original to read the more than 60 comments appended to it.

Active managers suffer worst year in 30; indexing triumphs

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Joshua Brown; TheReformedBroker.com

As this article at Reformed Broker explained on Friday, Lipper data shows that active security selection is on track for its worst performance in 30 years, with 85% of stock-picking fund managers failing to beat their respective indexes. Brown sums up the gap between promise and the reality of fund managers pithily:

“They cannot do what they profess to do on a consistent enough basis to justify the extra trading costs, management fees or tax ramifications.”

Coupled with all the press over the failings of actively managed mutual funds and the cost and tax-advantages of exchange-traded funds (ETFs), and lately ETF-based “robo-adviser” services, it appears the message is finally getting through to ordinary investors. Consider these sales numbers published by Reuters:

“Through Oct. 31, index stock funds and exchange traded funds have pulled in $206.2 billion in net deposits. Actively managed funds, a much larger universe, took in a much smaller $35.6 billion, sharply down from the $162 billion taken in during 2013, their first year of net inflows since 2007…”

Brown suggests active managers need to cut their fees in half (and he’s talking about the U.S., where fees are already lower than their Canadian equivalents).

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WSJ’s Jason Zweig

But let’s give the final word to the Wall Street Journal’s eminent personal finance columnist, Jason Zweig. The headline says it all: Stock indexing racks up another triumphant year.

Picking up on the Thanksgiving theme, Zweig begins by nothing “It’s been another turkey of a year for active stock-pickers.” He notes that the decline is even worse than three months earlier, when he wrote this:

” … active fund management is outmoded, and a lot of stock pickers are going to have to find something else to do for a living.”

However, taking a balanced approach to the issue, Zweig notes that these things go in cycles and there will be times when active managers have their time in the sun and indexing lags.  He concludes:

” … most stock pickers are still likely to underperform a comparable index fund over time. But they aren’t going to look quite this bad all the time.”