A Lap Of The Blogs

Posted by Preet on Dec 10, 2009 | 5 comments

If you are new to WhereDoesAllMyMoneyGo.com, every Friday I run a post called “A Lap Of The Blogs” which provides links to articles I found interesting and think that others may want to read for themselves. I also sometimes include some commentary on what’s going on in my personal life and a weekly “racing video” since my former life was in the auto-racing industry. The name “Lap of the Blogs” is in reference to “A Lap Of The Gods” which is an old video series which chronicled on-board footage of the world’s greatest F1 drivers lapping various racetracks from around the world. NOTE: you have to visit the actual website to see the embedded video – it may not appear in your email. Just click on the title of the email to see it…

The pilot is being edited right now and the decision now rests on the W Network if it will be greenlit into a series. I don’t know when the decision will be made, but I’ll be sure to let you know as soon as I do…

From Around The Blogosphere

The CEO of ING answers the first of your questions in Part I of our video interview series. This time he addresses the question as to whether ING is launching a no-fee chequing account.

Rob Carrick informs us that Canadians increased their net worth by $141 billion between April and June of this year.

Michael James on Money explains the angle of the new swath of door knockers – hot water tank salespeople. Also, a hat tip for his comments on my recent post on Modified Dietz.

Jonathan Chevreau reminds us that the RDSP deadline is fast approaching.

Thicken My Wallet shares some personal finance lessons from the rich and infamous.

Million Dollar Journey lists the 10 wealthiest Canadians.

Canadian Capitalist lists some important financial deadlines that are coming up quickly.

Four Pillars explains another way to use RRSPs to reduce taxes.

Big Cajun Man likes to play chicken with his banks.

This Week’s Racing Video

Gigi Gali is one of the most electrifying rally drivers you’ve never heard of. Here is but one short clip of his driving prowess. Take note of the incredible drift at the end – well worth the price of admission (free!).

Modified Dietz Return Calculations

Posted by Preet on Dec 9, 2009 | 7 comments

A reader sent in a question asking about the Modified Dietz Method for reporting portfolio performance. Specifically, her investment statement noted that this was the method used to calculate returns for clients and she just wanted to know if this was normal or not. It’s a good question. How many people have ever heard of the Modified Dietz Method before?

Performance Reporting for Investors

You would be surprised how much more (relatively) difficult it is to calculate portfolio performance when you are not dealing with lump sum investments made at the beginning of a reporting period with no distributions (or re-invested distributions). For example, it’s really easy if you start the year with $100,000 and at the end of the year you have $110,000 and no distributions were made during the year. It’s easy to figure out that you earned 10%.

But what happens if you’re portfolio spat out $10,000 in a dividend on June 30th, and you still ended up with only $110,000 by the end of the year (and the $10,000 was re-invested)? Your $100,000 earned 10% for 6 months, but then your $110,000 earned 0%. Your end performance would therefore have been less than 10% overall.

There are two main categories of calculating and reporting performance: Time-weighted returns and Dollar-Weighted Returns (aka Money Weighted Returns and both are also used interchangeably [depending on who you ask] with IRR, or Internal Rate of Return).

Time Weighted Returns

Time weighted returns aren’t as precise when you have large cash flows in a portfolio. For example if a portfolio had three years of 20% returns each year and then 0% return for the next three years the time-weighted return is 10% over the 6 years (arithmetic return, and we’ll ignore geometric returns for the purpose of this post). But what if you had $1 invested the first three years and then added $100,000 at the beginning of year 4? At the end of year 6 you would have just under $100,002. That certainly doesn’t seem like an average 10% return does it?

Dollar Weighted Returns

A dollar weighted return would calculate the above as follows: $1 earned 10% for 6 years, and $100,000 earned 0% for three years. Since the bulk of the portfolio did nothing, this would be reflected in the dollar weighted return being really close to 0%.

So which is the Modified Dietz?

The Modified Dietz is actually somewhat of a dollar weighted return which becomes time-weighted because performance is calculated for sub-periods which are then linked together. Huh? It’s funny if you look it up because some authoritative sources call it time-weighted, and some call it dollar weighted. Perhaps the mathematicians out there (Michael James?) can help us out on this. Here is the wikipedia link for Modified Dietz and the formula.

From the formula you can see it is dollar weighted, but by linking the returns between periods (which is a time weighted method on top of the dollar weighted calculation) it is somewhat of a hybrid.

Can you just tell me if it’s good or not?

Yes, it’s fine most of the time. The only time it will really distort your results is if you have multiple cash flows within one period and the markets are volatile (2008 & 2009 anyone?). This is because the sub-periods require proper portfolio valuations at the beginning and end of those periods and it is very onerous to do so. The Modified Dietz assumes an average rate of return for each sub-period. The Modified Dietz is (currently) an accepted methodology for portfolio performance reporting according to the GIPS standards (Global Investment Performance Standards), but it should be noted that GIPS (which is run by the CFA Institute) has recommended that performance reporting start calculating portfolio valuations when large cash flows occur (positive or negative) so that a more accurate rate of return can be calculated (as opposed to just using quarterly or monthly valuations and ignoring large cash flow timing as it stands now). These recommendations are to be adopted in January of 2010 (don’t know if it will apply to the reporting of dealer firms to retail clients though).

In the end, Modified Dietz is fine most of the time, but it’s not perfect.

Contest Winner and IKEA Christmas Tree Deal

Posted by Preet on Dec 8, 2009 | 4 comments

Thank you to everyone who entered the Reader Appreciation iPod Touch Giveaway contest. The winner was selected at random by using a random integer generator. While there were almost 300 entries in total (comments plus re-tweets), only one person could be selected as the winner and that person was:

Paul for the comment:

Great blog Preet, thanks for all the info over the years … no more RRSP book promotion though? That was how I first heard about your blog.

Note, the comment had nothing to do with the winner being selected! :) I’ve contacted Paul by email for him to claim his prize.

IKEA Christmas Tree Deal

I was shooting the final scenes for the pilot of the TV show I have in development with the W Network today and the line producer told me that she picked up a Christmas Tree at Ikea. She got a great deal and you can too: For $20 you can pick up a (real) Christmas Tree and receive a coupon for $20 off your next purchase over $75 from Ikea between January 2nd, 2010 to March 1st, 2010. Click here for the flyer.

Thanks again to everyone who entered the contest, and especially to the regular readers!

The Elves Index

Posted by Preet on Dec 6, 2009 | 2 comments

First a reminder: you only have a few hours left to enter the contest on this blog to win an iPod Touch. Click here for more details and to enter, but essentially all you have to do is leave a comment on the contest post page to earn an entry. At the time of writing this, entrants have a 1 in 232 chance of winning – not too bad!

The Elves Index

Christmas is upon us and I saw the Will Ferrell movie “Elf” last weekend on TV which reminded me of a story I came across about something known as The Elves Index. This was an an index that tracked the sentiment produced by technical signals used by analysts who appeared on Wall Street Week with Louis Rukeyser on a regular basis. Rukeyser referred to the technical analysts themselves as The Elves. Wall Street Week aired for about 36 years from 1970 until 2005 but Rukeyser abandoned the Elves Index in 2001. One of the reasons could be that the index was notorious for being wrong more often than it was right. In fact some people even used it as a contrarian indicator – when the Elves recommending selling or shorting the market, it was considered a good time to buy.

There is no shortage of “Elves” on TV today (talking heads and guest analysts) pontificating about the market’s direction. Unfortunately, there is no way to tell in advance if they actually have enlightened insight, or if they just sound smart. At best, analysts just narrow the range within which we guess.

Pets and Insurance

Posted by Preet on Dec 2, 2009 | 7 comments

Don’t forget to enter the iPod Touch giveaway. Click here for more details. BONUS: The Financial Blogger is also giving away an iPod Touch on his blog, so go there and enter his contest to increase your odds of winning.

Pets are like to children to many people. We had a few cats growing up, but the last one was Peter and we also had a dalmatian, Budweiser. They both died within a few months of each other and I was gutted. Those events have partly kept me from getting another pet because I don’t want to go through losing a loved one again. In any case, the reason I’m writing about this today is that I was doing some surfing/research on the differences between US online insurance sales and costs and Canadian online insurance sales and costs and I came across an article talking about the differences in how some people spend money on health-care with regards to their pets versus their children (US focused audience – for all our American readers you can check out their insurance quotes and let me know how they stack up).

You are more likely to go into debt for your kids than your pets

People, on average, are more likely to go into debt to treat their children than they are to go into debt to treat their pets. If people had the means to avoid debt, then the level of care secured might be more equitable. This is when pet insurance might make sense for people. If you are willing to do whatever it takes to treat your pet, but want to guard against a catastrophic loss (monetary), then you will definitely want to consider pet insurance.

The article provides some good points to consider if you are thinking about going down the route of pet insurance, such as exclusions based on breed/species of your pet, per-incident caps on benefits, multi-pet discounts, etc. It’s not enough to just get pet insurance if you think you need it, you need to check the fine print – especially as it’s easier to glaze over these kinds of details on decisions heavily influenced by emotions. But if the time comes, and your expectations are not met you’ll be doubly upset.

My opinion on insurance in general is that you should insure only against events that have the potential to ruin you. Buying that extended warranty on electronics doesn’t make sense to me. If you always buy that insurance, I would bet that the total claims you make over your lifetime are less than your total costs. Of course, if you are a klutz, that might be a different story. But the point is, it would be an inconvenience if your iPod broke, but it wouldn’t mean you are now teetering on losing your house. If you lost your income, on the other hand, that will ruin you – so it’s imperative to have disability insurance.

With pet owners, I think they would be more inclined to seek more treatment if insured, but this is notwithstanding the quality of life issues to deal with.

How the new ETN+ Notes can catch investors off guard

Posted by Preet on Dec 1, 2009 | 4 comments

At first blush, it seems Barclay’s new ETN+ notes provide a better mechanism for leveraged exposure to an underlying index without the path-dependency concerns of daily-reset, leveraged ETFs. However, it is useful to use an example provided by Barclay’s themselves to highlight a potential problem: the interest on the financed capital compounds.

Let me explain. The ETN+ notes are described using an analogy where an investor who is seeking 200% exposure to an index over time will borrow money equivalent to their original principal. Naturally, they will have to pay interest on the borrowed money. This interest would be paid out of pocket in our analogous example, but with the ETN+ notes, they don’t send you a bill for interest payments; rather, they get tacked on to your original principal owing meaning that the amount financed is always going up. This is an example of compound growth working against you. The longer you hold it, the more difficult it becomes to escape it’s grip.

Barclay’s provides a 246 page pricing supplement to the prospectus on ETN+ notes and one example they provide themselves is as follows:

Suppose you invested in an ETN+ note for 5 years and during that time the underlying index lost an annualized 0.56% (this works out to -2.79% cumulatively). The time period in question is November 7, 2003 to November 7, 2008 and the interest calculated is as it would be determined today (t-bill rate + 0.75%), and the example uses the actual historical t-bill rates during this time. In this scenario, the ETN+ 200% note lost 26.95% and the ETN+ 300% note lost 51.12%.

In a second scenario, from October 20, 2003 to October 20, 2008 the underlying index had an annualized return of +0.72%, or 3.66% cumulative. This time the ETN+ 200% note lost 17.07% and the ETN+ 300% note lost 31.79%.

In a third, more positive scenario, from July 11, 2002 to July 11, 2007 the underlying index had an annualized return of +12.39% (+79.32% cumulative). In this case the ETN+ 200% note gained 139.39% and the ETN+ 300% gained 199.46%.

So you can see, while they avoid the decay due to volatility (path dependency) of a daily reset leveraged ETF, the compounding effect of the accrued interest financing adds a new bogey in its place. If you expect these to return a set +/- 200%/300% less a nominal financing cost to facilitate the leverage, guess again.