Book Review of No Hype – The Straight Goods on Investing Your Money
By John Prescott
This review first appeared in Canadian MoneySaver, June, 2011
Like many Canadians, Gail Bebee faithfully contributed to her RRSP for many years, following the suggestions of her broker, until one day she started asking questions about what she owned. To her dismay she found that most of her savings were in mutual funds invested largely in Latin America, which weren't doing well and had high expenses. Her broker was very reluctant to replace these with two consistently good and safer performers with lower commissions and no trailer fees. Bebee woke up and started thinking for herself.
Early in this learning journey, Bebee discovered the Canadian MoneySaver and its sponsored ShareClubs, membership of which she says proved invaluable in her education. She gradually refined her approach to successful investing, toughing her way through the Canadian Securities Course, opening a discount brokerage account, and making her share of mistakes. No Hype is the eminently sensible and comprehensive book she couldn't find when she started learning about investing in Canada. For those interested in improving the financial literacy of Canadians, the subject of a somewhat self-serving recent national report, this book's sections could form the base for an excellent eight-week course on investing in Canada.
The first section, The Basics, includes the fundamental advice to assess your own approach to investing, to pay off debt first and to "pay yourself" before you spend. Her five universal rules of investing are: Think for yourself, Know yourself, Manage your risk, Be patient, Be decisive, with the cardinal rule being critical thinking. The two pages of basic investing math are the rule of 72 and compounding rates of return (Einstein's "eighth wonder of the world"), with some scenario examples. Successful investors are educated investors, a journey that takes life-long learning. Bebee lists 13 different sources of investing information, with comments on what to watch out for in the way of bias or misinformation. Canadian MoneySaver is "worth scanning regularly" and membership of its affiliated ShareClubs "potentially valuable".
Financial Service Providers
The second section discusses financial service providers. Where can Canadians find good financial advice? Sensibly, Bebee splits the problem into its two parts: investment advice and investment transactional services. For investment advice her one-page solution is: Do-it-yourself (DIY), Hire an advisor for an advice- only fee, Hire an advisor who also sells product, and pay them in this way, A combination of DIY and the other two. People deciding to go DIY to avoid fees need to be brutally honest with themselves and know whether they have the discipline and knowledge to be successful.
She suggests twelve steps to choosing an advisor, likening it to committing to a marriage. The extensive process she suggests has the unromantic and systematic questioning associated with an Internet-dating service. So the better analogy is to a long-term professional partnership, not to a marriage. The advisor should be asked to sign a written investment policy statement with all the terms agreed, including the fees. She sensibly suggests interviewing two or three advisors. Performance of the advisor should be reviewed after 6 months, and be critically assessed throughout the relationship. Investors must he fully aware that how advisors are paid has a critical impact on the financial advice received. Bebee gives a good overview of the wide variety of firms providing fee-based investment transaction services. For all these sources she points out their characteristics and weaknesses. She notes the need to ensure that the providers are members in good standing of their trade associations and have investor
Profits to Expect
Section three discusses the profit to be expected from different types of investments. There are excellent figures illustrating investment asset classes and their risks, the benchmarks against which performances are measured, and historical rates of return, relative risk and volatility. It's axiomatic that the higher the return, the greater the risk and volatility. How assets are allocated is crucial in affecting not only the return on investment but also the protection of the nest egg. Don't put all your eggs in one basket. Asset allocation will vary with each individual's situation. Bebee provides sensible examples based on different types of portfolios, noting the huge impact that taxation of different types of investment has on returns. People investing for 30 years of retirement need to take inflation into account; something costing $100 in 1977 would have cost a scary $330 in 2007.
Section four, on investment choices, is the longest in the book. Fixed income provides cash and reduces risk, but rates of return are relatively low compared to some stocks. Bebee discusses the variety of fixed-income instruments; she believes that the best ways for individuals to buy bonds is through ETFs. My worry about this, compared to say strip bonds, is the potential for loss of capital if interest rates rise to deal with inflation.
There's an excellent overview of stocks and the stock market, supporting the risk strategy that no stock should form more than 5% of the portfolio, so that 20 stocks is probably a good number to own. In her opinion, these stocks should be diversified in companies of different sizes across five general sectors (consumer products and services, industrial products and services, natural resources, utilities, and financial services). Because of favorable tax treatment, she suggests focusing on Canadian dividend-paying stocks and avoiding emerging markets because of their high risk. She also emphasizes picking excellent stocks at reasonable prices as the paramount criteria for stock purchases, providing 10 sensible steps to selecting such stocks. Having identified a stock to purchase, she waits until it goes on sale.
Most Canadians who invest in stocks do so through some of the over 7,000 Canadian mutual funds. In general, mutual funds in Canada have excessive fees, but it is well known that, despite high fees, most mutual funds underperform their benchmarks. In these days of ETFs, does it make sense to own mutual funds? Bebee says "yes" as a way to diversify small portfolios (<$50,000), to invest small amounts regularly, to invest with specific fund managers, and for other reasons. She identifies some very low-fee index mutual funds.
The range of ETFs has rapidly changed from vanilla to a bewildering array of increasingly exotic flavours. Careful selection can be done using Bebee's 7-step approach, with the advice "like all other investments, tread very carefully when choosing." My own sense is that one should be suspicious once the finance industry starts engineering exotic products. There may be more downsides to many ETFs than there might seem on face value. Although Bebee is a fan of ETFs for people who traditionally buy mutual funds, she provides sensible advice to selecting a mutual fund. Final chapters in this section discuss real estate ("most investors should include in some way;" Bebee favours REITs or real estate stocks over bricks and mortar), commodities (avoid), collectibles (hobby only), as well as different alternative investments which she largely and decisively dismisses out of hand ("hedge funds are unsuitable for most investors; options are very risky; initial public offerings and penny mining stocks are gambling class assets").
Section 5 discusses investment decision making. Bebee finds when to sell investments the most difficult part of investing, but provides good guidelines. Like many Canadian MoneySaver readers, she thinks that good stocks should be held for the long run, and definitely not sold in a panic. Market downturns are when you buy investments of high quality, not when you sell. Although she thinks that investment returns can be improved by market timing, and provides some tips, Bebee recognizes that this may take more effort than most investors wish to make. The only pattern that she subscribes to, although I'm not sure how seriously because it's so unlike her usual sober approach, is the link of the U.S. market to the presidential cycle.
Investment- Related Needs
Section 6 briefly discusses investment-related personal needs including retirement (how much do you really need?, RRSPs, annuities), saving for children's education, insurance, and estate planning, all with the sensible comments and perspectives that characterize this book.
Building Your Portfolio
Section 7 is the culmination of the book, applying the knowledge and insights gained into building and maintaining an investment portfolio, again prefaced with the number 1 rule of "Think for yourself." Bebee describes the overall elements of a written investment and financial plan, and suggests the input of a financial planner. She suggests that "start-up" portfolios be made of mutual funds, moving to ETFs as the portfolio expands, and including equities as it becomes larger. She suggests various portfolios (income, income focused, balanced, growth, aggressive growth), with bond ETFs or GIGs decreasing from 60% to 10% over these types.
Different investors will have various reactions to her suggestions, depending partly on their circumstances. For me they are not heavy enough on blue-chip Canadian dividend stocks. However, by the time a beginner is likely to be moving into the larger portfolio range, he or she will likely have learned to think for themselves and to have developed their own ideas and discipline. For people for who this is all just too complex, Bebee suggests a lazy investor portfolio based on ETFs, although too weighted to U.S. and European equities for my liking. Her final comments relate to ongoing investment management, record keeping, monitoring, periodic plan updates and the important reminder that life is for living, not for investing.
Overall, this is an excellent introduction for Canadians on investing, and a reminder to more seasoned investors needing a tune-up.