Entering the giveaway is real simple. Just leave a comment in this post and don’t forget to include a valid e-mail address. If you are reading this through your favourite RSS Reader or via-email, you have to click on the headline, get through to the website and scroll down to the bottom of the page and type in your comment.

Some quick rules:
(1) No purchase necessary. A skill-testing question may be required.
(2) Deadline for entries is 8 p.m. EST on Thursday, February 16, 2012.
(3) One entry per person please.
(4) I treat your privacy very seriously. Your email will be used for the sole purpose of contacting you if you happen to win.
(5) I’ll pick five (5) entries at random and announce the winner after the deadline. Thank you for entering and good luck!

PS: My weekly links post will be published over the weekend.

PPS: The winners in the TurboTax giveaway are Henria O., Chris and Andrew F. Thank you to everyone who entered.

Related Reading:

• Bloggers for Charity Update and Quicken Giveaway
• This and That: Pension Return Assumptions & TurboTax Giveaway
• Free Filing Options from UFile.ca and Giveaway
• Five years and counting…
• The Little Book Giveaway

H&R Block At Home 2011 Tax Software Giveaway is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Nokia (NOK: 54)
Nortel Networks (NT: $770)
Enron (ENE: $73)
Oracle (ORCL: $37)
Broadcom (BRCM: $118.50)
Viacom (VIA: $69)
Univision (UVN: $56.50)
Charles Schwab (SCH: 36)
Morgan Stanley (MWD: $89)
Genentech (DNA: $37.50)

A reader who followed this advice would have experienced a grievous loss of capital. Some of the stories are well-known: Nortel and Enron went poof! The technology names in the list have all declined substantially. Nokia is today trading at $5, Oracle is trading at $29; Broadcom at $38 and Charles Schwab at $12. Morgan Stanley survived the financial crisis but today trades at just $20. A little bit of financial archeology revealed what happened to the other names:

- The original Viacom split into Viacom Inc. (VIA) and CBS Corp. (CBS). Each share of the old VIA was split into 0.5 shares of VIA and 0.5 shares of CBS. The market value of the original shares today is $43.

- Univision, a Spanish-language broadcaster, went private in an all-stock deal in 2006 for $36.

- Genentech, the only winning stock in the list, was acquired by Roche for $95.

A $10,000 investment in each of these stocks in 2000 when the column was published, for a total of $100,000, would today only be worth $55,600 — a loss of 44% over a 11-year period. In the interest of fairness, it should be pointed out that the S&P 500 is down 10% in price level over the same time period. Granted, I did not bother to include the dividends that some of these stocks paid over the decade because it most likely won’t change the final conclusion: stock picks in magazines may be fun to read but the investment advice may not be worth the paper it is printed on.

Related Reading:

• Why You Shouldn’t Listen to Media Gurus
• Do you still own Nortel?
• An Enron Myth
• This and That: Who killed Nortel and more …
• IQ Trends Newsletter

Investing in Magazine Stock Picks is a Bad Idea is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

It is true that an investor can obtain spectacular returns by picking the right penny stock. If you had picked up Aber or Aurelian Resources back when they were penny stocks, your investment would have become a ten bagger many times over. But that’s a bit like saying if you pick the right combination in the LottoMax draw, you can turn a $5 “investment” into $50 million. The key question is how likely is it that an investor will pick a winner out of the thousands of penny mining stocks that trade on the Venture exchange?

Research into penny mining stocks is hard to come by but I did find one study that looked at returns on stocks trading in the over-the-counter (OTC) markets in the US. The study covered a 9-year period and examined the returns from more than 7,000 stocks that traded in the OTC. The findings in the paper, titled Do investors overpay for stocks with lottery-like payoffs? An examination of the returns on OTC stocks, will be sobering for investors interested in penny stocks. It found that more than half the stocks in the sample lose more than 95% of their value (and in the interest of fairness, it must be mentioned that slightly less than 1 percent of the stocks in the sample returned 1,000 percent or more) and average annual returns were -30 (minus thirty) percent. A $1,000 investment in OTC stocks would, on average, turn into $30 over a 10 year period.

If penny mining stocks were to have similar return characteristics as US OTC stocks, an investor can, on average, expect a total loss of the capital allocated to the risk portion over time. One would hope that this particular risk barbell strategy does not require an investor to regularly rebalance her portfolio!

Related Reading:

• Bogle’s Estimate of the Behavioral Gap
• The Dogs (of the Dow) Don’t Bark
• Mensa’s Poor Investment Record
• Emotions affects fixed income investors too
• Morningstar study on investor returns

Do Penny Mining Stocks count as Investments? is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Pricey Dividend Payers: This column in the New York Times points out that investors attracted to dividends should note that the sectors that a rich in dividend-payers such as utilities, REITS, health care and consumer staples are now trading at rich valuations.

Canada’s Housing Bubble: The Economist magazine weighs in on housing prices in Canada pointing out that the ratio of housing prices to income is now 30% above the historical average.

Modest Housing Returns: Larry Swedroe points out that a long view of history shows that returns from residential real estate are rather modest. In any case, he suggests that we think of housing as a consumption item rather as a pure investment.

TurboTax Online Giveaway

With T-slips and tax receipts starting to roll in, it is time for a tax preparation software giveaway. Thanks to Intuit, I’m giving away three (3) coupons that are good for any version of TurboTax Online (valued at $17.99 for Standard and $32.99 for Premium). As always, entering the giveaway is real simple. Just leave a comment in this post and don’t forget to include a valid e-mail address. If you are reading this through your favourite RSS Reader or via-email, you have to click on the headline, get through to the website and scroll down to the bottom of the page and type in your comment.

Some quick rules:
(1) No purchase necessary. A skill-testing question may be required.
(2) Deadline for entries is 8 p.m. EST on Thursday, February 9, 2012.
(3) One entry per person please.
(4) I treat your privacy very seriously. Your email will be used for the sole purpose of contacting you if you happen to win.
(5) I’ll pick three (3) entries at random and announce the winner after the deadline. Thank you for entering and good luck!

Related Reading:

• H&R Block At Home 2011 Tax Software Giveaway
• Bloggers for Charity Update and Quicken Giveaway
• This and That: Market Rally & UFile Giveaway
• Five years and counting…
• The Little Book Giveaway

This and That: Pension Return Assumptions & TurboTax Giveaway is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

We have already taken steps to limit the growth of our health care spending over that period. We must do the same for our retirement income system. Fortunately, the centerpiece of that system, the Canada Pension Plan, is fully funded, actuarially sound and does not need to be changed. For those elements of the system that are not funded, we will make the changes necessary to ensure sustainability for the next generation while not affecting current recipients.

Newspapers immediately started speculating that the Federal Government is contemplating raising the age of eligibility for Old Age Security (OAS) from 65 to 67. Other rumours suggested that the Government might lower the threshold at which OAS benefits are clawed back. We might have to wait for Finance Minister Jim Flaherty to table the budget document for insight into exactly what the Federal Government is planning to do.

The current brouhaha clearly illustrates the futility of detailed retirement planning for anyone under 40 years of age because a lot can change in the quarter century left until retirement. Perhaps, as the rumours suggest, Old Age Security will be radically altered by the time today’s 40-year olds retire. There may even be significant changes made to the Canada Pension Plan. Therefore, younger Canadians should spend most of their energies in building a strong financial base — establishing a savings habit, investing the savings prudently, paying down debt etc. — and worry about the minutiae of retirement plans as they get closer to retirement.

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• Retirement for Canadians
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• Liberal Proposals on the Canada Pension Plan
• Modest CPP Changes in the Works
• Major Changes Coming to the Canada Pension Plan

Under 40? Forget Retirement Planning is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

According to the Canadian ETF Association, iShares is already the dominant player in the ETF sector with a market share of 67%. Claymore currently occupies the #2 slot with a market share of 15.5%. When the deal is consummated (unfortunately, it is likely a question of “when”, not “if” the deal will be approved, because BlackRock can probably successfully argue that its market share of the overall fund business is fairly small), BlackRock’s market share will become even more dominant at 82.5%. Or look at it this way: iShares currently has 13 out of the 20 largest ETFs by assets under management. After acquiring Claymore, BlackRock will have 18 out of the top 20 ETFs.

It is true that other ETF vendors are competing strongly. In 2011, BMO was virtually tied with iShares in net ETF creations at 33%. Claymore occupied the #3 spot with 20%. Combining iShares with Claymore (Jon Chevreau cleverly dubbed the combination “ClayShares”) would mean BlackRock would have more than 50% of the 2011 ETF sales to go along with its dominant position in the ETF landscape. It is hard to see how the creation of a virtual monopoly will deliver innovation and choice for ETF investors.

Related Reading:

• State of the Canadian ETF Industry Q3-2011
• iShares ETFs becoming more expensive
• Wrap ETFs from Claymore
• More New ETFs
• Scotia iTrade’s Commission-Free ETFs: A good deal for some investors

iShares + Claymore is not good for Clients is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

In today’s uncertain economic times, there’s value in taking a closer look at a group of reliable financial institutions that are operating within an under-utilized and largely misunderstood alternative business model. These organizations, which began in December 1900, are positioning themselves to re-assert their differences and become more prominent in the financial industry.

This alternative business model is a co-operative; the institutions are credit unions.

Adhering to a basic philosophy that the most important business strategy is to serve the member/owners has enabled credit unions to develop into the competitive organizations they are today. Understanding of, and adherence to, the co-operative principles is the raison d’etre for Canada’s credit unions.

If you weren’t already aware, 2012 has been designated International Year of Co-operatives by the United Nations. What better excuse to share some numbers about Canada’s 419 credit unions. According to the Credit Union Central of Canada, credit unions in Canada employ over 25,000 individuals to serve the 5 million-plus member/owners. This service is delivered in over 1730 credit union branches located in all areas of the country from the largest cities to small rural settlements. Credit unions hold over $117 billion in assets. Together, they constitute the second largest lender to small businesses in Canada…a significant contribution and critical to the economic strength of the country.

But, when talking about credit unions it is important to look behind or perhaps beyond the economic impact. In addition to lending to the businesses that fuel the economy, credit unions are critical to the community itself. In many instances, if it were not for the credit union, the community would not have access to a financial services provider. More often than not, employees of credit unions also live in the community they serve. This allows them the advantage of being able to understand the needs of that community and support the objectives that are important to its growth and well-being.

Credit unions epitomize ‘co-operative’ social responsibility by making a real and sustainable difference in the lives of their member/owners and their community. They lead the way in community giving and volunteerism; through donations, services, scholarships and volunteerism, credit unions contributed more than $37.5 million to individuals and organizations in their communities in 2010.

The small community of Churchbridge, Saskatchewan is a great example. One of the flagships of their community is the town’s public swimming pool. When the staff of Churchbridge Credit Union learned of the need to replace the worn, 40-year old relic, they dove right in as it were. By pioneering initiatives such as staff and board matched donations, holding community BBQs and offering town residents a 0% interest free loan program to encourage participation, over $32,000 was raised. And if that wasn’t enough, staff members voluntarily sat on the planning committee and worked on the building and on the fundraising efforts to support. A true community approach for the 900 residents.

There are success stories like this one all across Canada. With help from local credit unions, many communities continue to prosper, both economically, and in corporate giving thanks to the creation of the co-operative principles over 100 years ago. Those principles are still alive – and are a viable alternative for us all in 2012 and beyond.

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• High Interest Savings Accounts

Economic Impacts and Social Values of Credit Unions is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Reader Cal wondered how the lag would affect an investor who wants to invest $10,000 in US stocks and has the option of simply picking XSP versus converting to US dollars, buying IVV and after 25 years converting back to Canadian dollars. Since there are a number of variables, I constructed a spreadsheet to play around with the following variables:

- the term of investment (in years)
- annual returns
- Currency-hedged fund tracking error
- Currency conversion cost
- size of currency appreciation / depreciation over the investment term

For a 25 year term, annual returns of 7%, currency-hedging lag of 1.5%, one-way currency conversion cost of 1.5%, we find that (no surprises here) not hedging is advantageous if the foreign currency appreciates or remains the same against the Canadian dollar.

Under these assumptions, due to the large annual performance lag of currency-hedged funds, currency hedging turns out to be unprofitable even when the foreign currency depreciates by 25%. It is only when the foreign currency depreciates by 30% or more that the currency hedged fund comes out ahead. If the depreciation is 50%, the currency hedged fund has an advantage of 31% over its unhedged counterpart.

The spreadsheet will allow you to play around with the variables. For instance, if you use Norbert Gambit to convert currency, your costs might be as low as 0.2%. And if the performance lag of the currency hedged fund is 2% then not hedging is advantageous even at a depreciation of 35%.

The spreadsheet is available here.

Related Reading:

• The Costs of Currency Hedging
• Currency-Hedged Funds Underperformed in 2010
• Performance of Currency-Neutral S&P 500 Index Funds
• Currency-neutral S&P 500 Fund Versus S&P 500 Returns in CAD
• Currency Effect on Foreign Equity Holdings

Comparing Currency-Hedged and Unhedged Holdings is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

I’ve looked at the tracking error of S&P 500 currency-neutral funds in past years but the tracking errors in the iShares CDN MSCI EAFE 100% Hedged to CAD Dollars Index (TSX: XIN) remained a mystery because I didn’t have the annual return data for the MSCI EAFE Index* in local currency. XIN holds the iShares MSCI EAFE Index fund (NYSE Arca: EFA) and hedges the foreign currency exposure that EFA’s holdings are denominated in, so that the returns of stocks will not be impacted by changes in the exchange rates between Canadian Dollars and Yen, Pound, Euros and other currencies. (As an aside note that even though EFA trades in the US, Canadian investors holding EFA are not affected by fluctuations in the exchange rate between the CAD and USD but are exposed to the fluctuations between the CAD and a basket of currencies such as Yen, Pound, Euros etc.).

Fortunately, MSCI Barra reports the returns of MSCI EAFE and other MSCI indices in local currencies on their website. Armed with that data, we can look at how well XIN tracks the MSCI EAFE in local currency terms. The following table shows the annual total returns of MSCI EAFE Index in its local currencies (column 2) with XIN (column 3). The results are consistent with our earlier analysis of the tracking error of XSP. XIN shows an annualized tracking error of 1.30%, which is lower than the tracking error shown by XSP but still wide enough to suggest that currency hedging is highly likely to be unprofitable.

 
When a Canadian investor holds a foreign investment directly, they take on the risk that currency fluctuations will affect their returns. Sometimes, the fluctuations will be in the investor’s favour. Other times, as Canadian investors directly holding US securities can readily attest to, fluctuations will hurt returns. Canadian investors in the iShares MSCI EAFE Index Fund (EFA) would have experienced a significant boost from the currency effect. In local currency terms, the MSCI EAFE Index lost 17.3% over the 2006 to 2011 period. Since investors in XIN trailed the index by an annualized 1.30%, XIN’s loss over the same six year period is 23.73%. However, a Canadian investor holding EFA directly would have a loss of 13.91% over the same time period.

The verdict on currency-hedging then (based on an admittedly short history of just 6 years) is clear: Long-term investors are highly unlikely to profit from hedging their currency exposure because currency effects have to overcome significantly large tracking errors simply to break even. When currency effects are negative (as it was the case of the CAD/USD and US markets over 2006 to 2011), currency-hedging still did not show a profit due to tracking error. With positive currency effects (as was the case with CAD/basket and EAFE index over 2006 to 2011), currency-hedged investors are trailing even more because investors did not get the currency boost and paid for their hedging efforts through tracking error.

* – MSCI EAFE Index tracks stock markets in Europe, Australasia and Far East and holds securities that trade in countries such as Japan, the UK and Germany.

Related Reading:

• The Costs of Currency Hedging
• A Tour of ETFs: iShares MSCI EAFE Index Fund
• Comparing Currency-Hedged and Unhedged Holdings
• Flavours of an Index Fund
• Performance of Currency-Neutral S&P 500 Index Funds

Performance of the Currency-Neutral MSCI EAFE Index Fund is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Many investors would like to have exposure to US stocks in their portfolio even if they believe that the US dollar is in a secular decline against other major currencies. In theory, currency-neutral funds seem to offer the best of both worlds: exposure to one of the world’s most dynamic stock markets without the baggage of the risk of a depreciating currency. However, if you look at the (short) performance history of currency-neutral funds, a different reality emerges.

First, let’s compare the returns of the iShares CDN S&P 500 Hedged to Canadian Dollars Index Fund (TSX: XSP) with the iShares S&P 500 Index Fund (NYSE Arca: IVV) in US dollars. In the following table, the annual total returns of XSP are listed in Column 2 and the total returns of IVV in US dollars are listed in Column 3. The performance between the two funds is compared from 2006 because in 2005 and earlier years, XSP was a clone fund that used derivatives to skirt RRSP foreign content rules that were in place at that time. While XSP’s MER of 0.25% is just 16 basis points (0.16%) higher than IVV, the difference in performance (shown in Column 4) is much wider.

A Canadian investor who put $100 (Canadian) in XSP in 2006 would be left with just $99.27 at the end of 2011. A US investor who put $100 (US) in IVV, on the other hand, would be left with $114.03. In other words, the returns in XSP trailed that of IVV by an annualized rate of 2.33%. A Canadian investor betting that the C$ would appreciate against the USD and opting XSP over holding IVV directly would have been right on the first count but made no money on the bet. The C$ appreciated at an annualized 2.20% against the USD but the tracking error of XSP wiped out all the gains and then some.

This pattern of the currency-neutral fund exhibiting significant tracking error can also be observed in the TD e-Series index funds. As you can see in the following table, the TD e-Series US Index Currency Neutral fund underperforms the TD e-Series US Index (US$) fund by an annualized 1.82%.

It is often asked why currency-hedged funds have exhibited such horrendous tracking errors. It turns out that the bulk of the blame can be attributed to the tendency of stocks and currencies to move in opposite directions (See post Why Currency-Hedged Funds have Large Tracking Errors).

So, what should investors do? If past performance is any indication and if investment performance is the only consideration, it appears that investors will likely be better off obtaining direct exposure to foreign equities without hedging away currency exposure. Owning foreign stocks directly has provided better returns in the past and it has done so with lower risk.

Related Reading:

• Currency Neutral Funds Performed Poorly (Again) in 2008
• The Costs of Currency Hedging
• Performance of the Currency-Neutral MSCI EAFE Index Fund
• Comparing Currency-Hedged and Unhedged Holdings
• Currency-Hedged Funds Underperformed in 2010

Performance of Currency-Neutral S&P 500 Index Funds is brought to you by Canadian Capitalist -- Helping you to invest & prosper.