Do active managers really protect your downside?

When you watch a magic act, it’s fun to be fooled. Even though we know it’s just a sleight of hand, it’s still entertaining when that torn-up card reappears out of nowhere. 

Unfortunately, it’s not nearly as fun to invest in ordinary index funds, staying the course in pursuit of the expected returns a well-structured portfolio has historically delivered. Maybe that’s why it’s so tempting to fall for an active advisor’s contention that he – or she – is one of the magical few who can protect you during down markets, whisking your money out of harm’s way before the fall and, wonder of wonders, reanimating your stake once the coast is clear. 

In today’s Common Sense Investing, let’s take a closer look at what’s really up those active managers’ sleeves, and why I favor index fund investing, where what you see is what you can expect to get. 

Original post at pwlcapital.com.

Does income investing really increase your income?

“You’ve got to have money to make money,” or so the saying goes. Maybe that’s one reason loading up on dividend-yielding stocks is so appealing to so many investors. There’s just one problem: Dividend stock investments don’t really work the way most people think they do. 

Bulking up on dividend-paying stocks may seem like a handy way to generate cash flow, but it’s more like a mental accounting trick than an actual source of “extra money.” Plus, it gets in the way of several equally important investment goals, such as tax efficiency, global diversification, and earning risk-adjusted market returns. 

Fortunately, a shift in focus to total return investing incorporates all of these goals at once, and fits right into Common Sense Investing. Find out more by watching today’s video, and to keep my stream of videos flowing, subscribe here

Original post at pwlcapital.com.

Why I prefer to avoid preferred shares (Alternative Investments, Part 2)

When you fly, it’s nice to enjoy the perks that come from a preferred status – cushy seats, exclusive lounges, tasty treats … or so I hear. It’s only natural to assume that “preferred shares” would likewise enhance your investment experience. But have they actually delivered as the name suggests? The short answer is: Not so much. Their inherent structure tends to create far more potential risks than expected rewards.

In short, there are several practical reasons why I prefer to avoid preferred shares. Learn what they are in today’s Common Sense Investing video (part 2 in an ongoing series on alternative investments). 

For more Common Sense viewing, your best alternative is to subscribe here

Original post at pwlcapital.com.

Do You Need Alternative Investments? Part I: High Yield Bonds

Do you need more yield? High yield bonds might be the answer. But not actually. Bonds are typically held in your portfolio for stability, but high yield bonds are risky enough that they should not be relied on for that purpose.

Investing in high yield bonds may be done for other reasons, such as diversification. Unfortunately they have not historically done a very good job at increasing the risk-adjusted returns of investment portfolios. Are high yield bonds a good investment? Only time will tell. In today’s Common Sense Investing video, I review the long-term evidence on high yield bonds, and offer my opinion on their use in portfolios.

For more like this, subscribe to Common Sense Investing for a new video every two weeks.

Original post at pwlcapital.com.

Should You Currency Hedge Your Portfolio?

If you’re worried that currency fluctuations might hurt your returns, then hedging can seem like a pretty good idea. It’s a shame that there is no evidence to back that idea up. Time and again it has been shown that currency hedging does not have a material impact on the long-term risk and return characteristics of an equity portfolio. So – should you hedge? 

Trying to make a decision in the absence of evidence is kind of like betting on a coin flip. You might win, you might lose, but there is no reason to expect one outcome over the other. In today’s Common Sense Investing video, I will survey the research and provide you with some ideas on how to make the currency hedging decision in your portfolio.

 If you’ve been worried about adding a hedge to your portfolio before the dollar rises – don’t be. It’s impossible to consistently hedge at exactly the right time. It is, however, possible to subscribe to Common Sense Investing for a new video every two weeks.

Original post at pwlcapital.com.

Are too many people investing in index funds?

I almost feel sorry for them: Active managers warning us that we’re going to break the market if too many of us stop playing their beat-the-market games, and embrace common-sense, index-fund investing instead. To be honest, their warnings strike me as an act of desperation, like the cry of the horse & buggy industry when Henry Ford came along. 

Just as Ford’s mass-produced horseless carriage did bring an end to an obsolete era of transportation, index investing is gathering steam compared to less practical approaches. That much seems true. But in today’s Common Sense Investing video, I’ll tell you why I’m not worried one bit that index investing is going to backfire, or otherwise stall out our mostly efficient markets. I’ll ground my perspective in the usual solid evidence – recent and historical. 

So if you’ve been worried that you might destroy the stock markets – or be destroyed by them – as you embrace index fund investing … don’t be. Channel that energy instead into watching for more Common Sense Investing installments by subscribing here and clicking on the bell. 

Original post at pwlcapital.com.

The TFSA Is a Give-away, But It’s Not a Toy

How often does anyone, especially the government, give you something for nothing? Canada’s Tax-Free Savings Account, or TFSA, is the rare exception. Introduced in 2009, your TFSA lets you save and invest after-tax assets that then grow tax-free. Both the principal and earnings also remain tax-free upon withdrawal. The government even throws in more “room” each year for you to add more – currently up to $5,500/year.  

It’s a sweet deal, for sure. But too often, I see people using their TFSA like it’s a toy instead of as the incredibly powerful financial tool it can be.

The wishful thinking goes something like this: “If I use my TFSA to ‘play the market’ and I happen to win big, it’ll all be tax-free. Yippee!” But as I explain in today’s video, there are important reasons you are far more likely to lose out on important tax savings than you are to hit pay dirt by turning your TFSA into a fanciful playground.

Bottom line, the essential laws of Common Sense Investing still apply in your TFSA, just as they do in any other financial account you may hold. Would you like to keep those essentials coming your way? Be sure to subscribe here and click on the bell.

Original post at pwlcapital.com.

Bond Index Funds in Rising-Rate Environments

In past videos, I’ve been covering the benefits of using passively managed index funds for your stock/equity investing. But what about bonds/fixed income? Since interest rates essentially have nowhere to go but up, could an active manager protect you from eventually falling prices?

Here’s the short answer: For stocks and bonds alike, we recommend a low-cost index approach over active attempts to react to an unknowable future. As a Common Sense Investing fan, though, you might want to know more about why this is so.

Think of it this way: If the markets were a three-ring circus (which they sometimes are!), stocks are your high wire acts of daring. Bonds are more like your wise old elephants. When you hear scare-stories about rising rates leading to plummeting yields, first, remember, a sturdy bond portfolio shouldn’t have that far to move to begin with. Second, despite the label “passive,” bond index funds don’t just sit there when rates change. They’ve got a balancing act of their own, but it’s based on patient persistence instead of a bunch of clowning around.

Want to keep your Common Sense Investing act in the center ring? Subscribe here, click on the bell, and the show will go on.

Original post at pwlcapital.com.