The Single Best Investment

 singlebestThe Single Best Investment: Creating Wealth with Dividend Growth, is the title of a classic investment book first published in 2006 by Lowell Miller, who heads Miller/Howard Investments.

It came to my attention via Wes Moss, who I interviewed for an upcoming MoneySense column, whose book You Can Retire Sooner Than You Think we reviewed here at the Hub. I mentioned the book in passing last week in this MoneySense blog last week. That blog focused on asset allocation but provided a big hint about Miller’s philosophy: there’s no place for bonds in Lowell’s investment worldview.

The book’s first chapter sets the tone in its title: Say goodbye to bonds and hello to bouncing principal. Like many stock believers and bond haters, Miller takes it as a given that the investing environment generally includes inflation. Since “safe” investments like t-bills, bonds, money market mutual funds and CDs (Certificates of Deposits in his native USA; known as GICs in Canada) are all “poor investments because what they give is less than inflation takes away.” Read more

How my novel harness-race betting strategy relates to investing

Harness racing. Racing horses harnessed to lightweight strollers.

Go horse #5!

Here’s my latest MoneySense blog, which bears the headline When dividend investing trumps a balanced portfolio.

That’s an accurate depiction of the content but here at the Hub we’re sticking with the more offbeat headline used above. Because this column really does begin with a true story about harness racing in Florida.

How can that possibly relate to asset allocation and dividend investing? Click the above link to find out, or the Hub’s version below. And yes, the happy winner depicted below clutching a winning ticket is my wife, Ruth Snowden.

She’s known in her industry by that name. When we got married more than a quarter century ago she was concerned I might take offence that she didn’t want to use my surname in business circles. My response won’t surprise those who know us: “Honey, you can call yourself whatever you want as long as you pay half the mortgage!”. Of course, the mortgage has long been paid off, consistent with the Hub’s philosophy that “the foundation of Financial Independence is a paid-for home.” Read more

Lifestyle Rebalancing

Pretty scary markets the last few weeks! Here’s my latest MoneySense blog, entitled A different kind of rebalancing. It looks at the topic of rebalancing not just from an asset class perspective but also from a lifestyle point of view. Mind you, it was written in the summer and recounted what I was doing in the spring when markets were still moving to ever-higher records.

Right now? Not so much!

The dawn of the “light advice” investing model

You may have heard the phrase “robo-adviser” but as implemented in Canada, the phrase “light advice” may be more appropriate.

Read more here in my column in the Financial Post.

For purposes of continuity and “one-stop-shopping” I’ve included the piece below, and added the minor clarification that Wealth Simple has now received regulatory approval.

NauvzerBabul

Nauvzer Babul, founder of smartmoneyinvest.ca

The term robo-advisor has come into widespread use in recent months, with a handful of firms starting up in Canada.

The model for this is Palo Alto, Calif.-based WealthFront, founded in 2008. It describes itself as an “automated investment service.” It assembles portfolios of passively managed exchange-traded funds (ETFs), matching client investment objectives and risk tolerance to the ETF selection, with appropriate asset allocation and regular rebalancing.

The fees are low: nothing on accounts below US$10,000 and after that it bills clients monthly at a rate equivalent to 0.25% annually of assets under management (plus the fees of the underlying ETFs, many of which are from Vanguard).

Subscription-based Couch Potato service

One of the first Canadian equivalents is Toronto-based NestWealth.com, launched by Randy Cass starting in Ontario and set to roll out nationally this year. I call this a “subscription-based Couch Potato service.” Cass got the idea from watching his son watch the subscription-based Web TV service, Netflix.

For $80/month (or $40/month for those under 40) customers can “subscribe” to a service that chooses and monitors a portfolio of ETFs — selected from Vanguard Canada and Black Rock Canada’s iShares families. As with similar services, NestWealth will worry about asset allocation and rebalancing.

Wealth Simple now approved

Awaiting regulatory approval — now received — is Michael Katchen’s WealthSimple, a “light advice” model that takes a more traditional approach of levying an annual asset-based fee of 0.5%, which will be above and beyond the underlying fees of the ETFs themselves. Fees taper down with higher amounts of wealth.

SmartMoneyInvest.ca about to launch

Also about to launch is another Toronto-based firm called Smart Money Capital Management, which will operate on the web as www.smartmoneyinvest.ca. Founder and managing director Nauvzer Babul told me in an interview that “no one in this space calls themselves robo advisors. The term was coined in the United States, where everything is very automated. My goal is to be between that and where we are in the Canadian investing space, where there is advice and a person to meet with. Clients can speak with live people who try to understand their risk tolerance and understanding, then develop a portfolio around that. There’s definitely human interaction.”

At least in the Canadian model, “light advice” seems a better description than “robo-advisor.” In any case, fees will be higher than what do-it-yourself (DIY) investors would pay buying their own ETFs at discount brokerages (perhaps aided by some fee-for-service advice from a human financial planner). On the other hand, fees of these automated or semi-automated portfolio management systems should come in well below “wrap” programs offered by major Canadian financial institutions and certainly below the Management Expense Ratios (MERs) of most actively managed retail mutual funds sold in Canada.

In other words, a DIY investor might pay just the MERs of the underlying ETFs, meaning somewhere between about 0.10% and 0.55%, depending on the products chosen. Wraps and DSC mutual funds typically come in between 2.5% and 3% or a tad above that. So you can figure a typical robo-advisor or light advice service should come in somewhere between 1% and 1.5%, including the MERs of the underlying ETFs.

In the case of Babul’s firm, the annual asset-based fee charged is 0.45%, on top of the underlying ETFs, so the total portfolios should come in around or slightly below 1%, all in.

Retail investors take on too much risk picking stocks

What kind of value can investors derive from such a service? Babul provides an interesting response, drawing on his 13 years of investment banking experience at BMO Capital Markets, which he left three years ago. In managing its derivatives business, Babul developed an intimate understanding of risk management. He noticed that retail investors tend to take on more risk than institutional investors. “I believe individuals picking individual stocks are taking on too much risk. Many institutional investors are more index-based than stock-pickers because they don’t want to be exposed to undue systematic risk.”

Babul’s goal is to invest clients in diversified global portfolios of ETFs. “We’re not trying to beat the market, but just create a diversified portfolio that adequately manages their risk tolerance.”

I ask whether there was a time when Babul ever believed in market timing and stock-picking.

“Yes.”

“What changed?”

“I saw my portfolio’s performance.”

 

Gold & Findependence

silver-and-gold-bullionSince the price of gold crashed a few weeks ago, I’ve twice blogged on the topic over at MoneySense.ca, as you can read here. I’ve also done a bit of radio and TV commentary on the topic. As noted at MoneySense, personally I’m somewhere between the 5% “gold as insurance” camp and the “gold bug” camp that allocates upwards of 15 to 25% of a total portfolio to the yellow metal as a permanent strategic allocation in a well balanced portfolio.

My second MoneySense blog looks at Nick Barisheff’s just-released book, $10,000 Gold, a prediction which if it came true would mean a seven-bagger from the most recent post-correction price of $1460 or so. Of course, gold has started to recover from the shocking drop that grabbed the media’s attention earlier this month.

So how does gold fit in with the concept of financial independence? Historically, it has held its own in providing a degree of capital preservation. Anyone who experienced the hyperinflation of Weimar Germany or more recently Zimbabwe can attest to the value of “real money” when contrasted with mere pieces of paper that once promised to pay the underlying metal “to the bearer on demand,” but today are no more real than digits in a computer somewhere.

Bricks & Mortar are another tangible investment I like

So the question isn’t so much whether gold could possibly rise seven fold or ten fold from here, although that’s roughly what it DID accomplish over the past decade. The question is whether paper money backed only by governments with unlimited access to printing presses can continue to be perceived as having value. Just as real estate investors see value in bricks and mortar and the assured streams of income known as “rent,” so too do some investors feel comfortable having at least some of their wealth in tangible precious metals or comparable financial derivatives they hope will retain value if mere paper money falls in value (i.e. ETFs like GLD or SLV). As readers of Findependence Day know, a major subplot of the book is the conflict between Sheena’s desire for tangible bricks and mortar and Jamie’s preference for paper/electronic assets like stocks and bonds.

I’m a Capital Preservation Asset Allocation Bug

Does all this make me a gold bug? No, it makes me a capital preservation asset allocation bug: SOME gold, some cash, some bonds, some stocks and some real estate. And of course, that’s just the investment part of the equation. To this we should add employer pensions and Government pensions like Social Security or the Canada Pension Plan. If someone came to me saying they believed ONLY in their employer pension plan or ONLY in their Social Security or CPP pensions, I’d be just as worried on their behalf as I would be if they told me they had only paper money or — for that matter — only gold coins.

Together, this is my recipe for financial independence.