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.jpg) The world of investing in and elsewhere is filled with myths and legends not easily distinguished from reality. Not convinced? Try to figure out which of the following statements are true or false. Click where indicated for the answer.
Myth 1: Passively investing, (choosing investments in order to track or follow rather than seeking to beat the overall market) is for losers. The argument in favor of passive, index investing is based on complex, unproven theories about a so-called equilibrium in the forces underlying the financial markets. True or false?
Click here for answer...Here is the answer of a famous american finance professor:
If "active" and "passive" management styles are defined in sensible ways, it must be the case that (1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and (2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar. These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.Per : William F. Sharpe, article in 1991, Nobel prize winner.
Myth 2 : Any reputable business school graduate can easily beat an index fund over a full market cycle. True or false?
Click here for answer... Here is the comment of the same professor and Nobel Prize winner:
Statements such as these are made with alarming frequency by investment professionals. In some cases, subtle and sophisticated reasoning may be involved. More often (alas), the conclusions can only be justified by assuming that the laws of arithmetic have been suspended for the convenience of those who choose to pursue careers as active managers.> William F. Sharpe, article in 1991.
Myth 3: Forget investing on your own. Superior intelligence and years of specialized studies and training are necessary if the average independent or self-investor is to hope equaling the track record of investment professionals. True or false?
Click here for answer...Our site will point you toward books and other sources which will help you determine if you have the personal profile for do-it-yourself investing.
This said, here is a comment of another well-known finance professor:
There is a crucial difference about playing the game of investing compared to virtually any other activity. Most of us have no chance of being as good as the average in any pursuit where others practice and hone skills for many, many hours. But we can be as good as the average investor in the stock market with no practice at all.
M. Jeremy  Siegel (in the book The Bogleheads)
Myth 4: For the best long term performance of my portfolio, the following factors are ranked by order of importance ( the first being the most important etc). True or false?
i) choose shares of good companies ( or choose shares of companies that do business in good sectors of the economy) ;
ii) choose the right moment to buy or sell; or
iii) choose the right percentage of my portfolio for investing in shares.
Click here for answer... False. Factor iii) is far and away the most important of the three factors in determining the long-term return of a diversified portfolio.
Myth 5: The costs assumed by investors in Canadian mutual funds are among the lowest in the world. True or false?
Click here are answer...False. According to a recent international comparative study, canadian mutual fund costs are not only higher than in the , they are the highest in the world.
Myth 6: To minimize transaction costs the do-it-yourself investor should invest directly (ie. without a broker) in government of bonds or certificates of deposit through the Bank of Canada. True or false?
Click here for answer...False. Unfortunately, and contrary to the governments of Quebec (for certificates of deposit) and of the (for government bonds) the Bank of Canada does not permit self-investors to open an account with the Bank and directly purchase bonds sold by the Bank.
Mith 7: The best indicator of the competence of your mutual fund manager is the return on your fund over the last several years. True or false?
Click here for answer...Not necessarily the case, for several reasons. Here are two: First, past results are not a guarantee of future performance. This is so true that securities commissions require mutual funds to state it in their prospectuses. Secondly, Ellis (an investor and adviser, author of numerous books on investing, and past lecture at Harvard and Yale) explains that to correctly assess the true performance of a fund manager you should receive management reports over many years for all of the funds he manages, otherwise you are evaluating him solely on the performance of your fund- a sample of one.
Myth 8: Preferred shares are more similar to an investment in bonds than in common shares. True or false?
Click here for answer...True, with explanations.
Our site considers non-convertible preferred shares as a type of debt or fixed income security for investment purposes. The market value of investment-grade non-convertible preferred shares follows changes in interest rates in similar fashion to debt securities. Why do some persons not view preferred shares as we do? It is probably because in a bankruptcy a holder of preferred shares is generally paid after holders of debt securities but before holders of common shares, and accordingly are at greater risk then debt securities of the same issuer. However the relative creditworthiness of two issuers can be such that the preferred shares of one are less risky than debt securities of the other. For investment grade issuers the market gives little weight to differences in ranking of preferred shares and debt securities; differences in Canadian tax treatment of dividend and interest payment explain most if not all of the differences in yield of preferred shares and corporate bonds of similar terms (eg. maturity) of the same issuer.
This said, our site examines in detail if independent investors should purchase corporate bonds and preferred shares at all, or restrict their fixed income purchases to government bonds.
Myth 9: The level of mutual fund management fees (which you as a holder of fund units assume) are not important since they permit the fund to pay professional managers who work to give you the highest possible return on your investment True or false?.
Click here for answer...False, for several reasons.
An important part of management fees charged to investors are in fact typically not used to pay the manager, but are used by the fund distributor to pay brokers through whom you purchase and continue to hold the fund units. In other words, the money is not used for fund asset management purposes.
In addition, according to a study referred to by the Bogleheads, of all possible indicators, the level of management fees is the only reliable (negative) factor to predict a fund’s future performance. Stated otherwise, a Canadian study by Morningstar indicates that returns decrease with increasing levels of management fees.
Myth 10: Securities regulations governing mutual fund advertising require fund distributors to include in their publicity complete historical fund performance results of their fund manager i.e. not only show performances in years or in those funds managed by the manager which outperformed the market. True or false?
Click here for answer...False. You rarely if ever see advertising which discloses poor performances.
Myth 11: It is generally more profitable for independent investors to invest in mutual fund bond funds rather than to invest directly in bonds. True or false?
Click here for answer...False, for several reasons. For a partial explanation, here is a quote by financial journalist Andrew Allentuck: Sad to say, data fail to show that this wonderful model of mutual fund convenience and performance works. That’s because fees devastate managers’ performance, leaving only very few funds with returns that are more than what the investor could obtain on his or her own behalf in direct bond purchases or through the use of exchange-traded funds that package well-defined fixed income products in low fee wrappers.
Myth 12: The Canadian stock market is one of the major North-American and global markets (10%+ of the North-American markets and 5%+ of world markets. True or false?
Click here for answer...False. Canadian stock markets are marginal in importance. They represent less than 3% of world markets. And since the markets alone represent approximately 50% of world markets, the Canadian markets represent only 5 to 6% of North-American markets.
Myth 13 : By trading online I can make a fortune. True or false?
Click here for answer...
Myth 14 : If you save 1.0% in investment costs each year, and assuming the same rate of return, how much more will you have accumulated at retirement (after 30 years): 1%, 5%, 10% ou 20% ?
Click here for answer...20%. Calculated by M. Paul Bourget, professor at CEGEP Rosemont school in Montréal. And the more you extend the period and/or the investment costs, the greater the burden. Thus, in 50 years, investment costs of 1.5% per year will eat-up more than 50% of your return; calculation per book by ex- Merrill Lynch USA analyst, Henry Blodget, 2007.
Myth 15 : A good financial adviser will recommend that I sell my stock exchange investments before the next market downturn. True or false?
Click here for answer... Not without in the interim missing out on several important market increases and at the risk of making you incur significant tax and transaction costs. If market declines were predictable, everyone would get out of the market. NB : This question and answer from a book by ex-Merrill Lynch analyst, Henry Blodget, 2007.
Myth 16 : Perhaps the average mutual fund manager does not beat the market. But with the help of friends, business acquaintances and my bank manager I have found a fantastic fund manager who I have no doubt will beat the market. True or false?
Click here for answer... It is difficult to identify in advance star managers. Past returns are not a guarantee of future performance. If you meet 100 fund managers you will find that they all use the same jargon and each inevitably concludes that he is the exception to the rule. Human nature being what it is, it is tempting to think we have found the diamond in the rough. For more, read the book by investment counsel Keith Mathews, p.87, Myth number 2- «Star Managers can be identified in advance ». |
