Friday, April 27, 2001
Mutual Funds for Canadians for Dummies
Picking mutual funds is no easy chore but, as Andrew Bell, investment reporter for the Globe and Mail's ROBTV, explains, it can be done if the investor does his homework well. To that end, he offers the rules for successful investing, including "If they don't have clean water, think long and hard about investing there"; "to maintain a thriving fund portfolio, stop looking at it"; and "three words: manager over 35."
Mr. Bell, who served as a gifted reporter for the Globe's investment section before his elevation to television, has used this mix of broad and deep knowledge and dark humour to produce one of the best mutual fund how to books on the market.
What not to do is a large part of the book. Among the shudders that Mr. Bell recalls is the 1988 collapse of a huge hedge fund (one open to high rollers that are willing to have their money leveraged with a lot of borrowed money and put into short positions that can generate infinite losses). That was Long-Term Capital Management, a Connecticut-based outfit with over $1 trillion invested with counterparties in swaps and tens of thousands of deals too complex to describe. LTCM had not just PHDs on staff, but a couple of backer-advisors who had invented the formulas for valuing options and received Nobel prizes for their efforts, the best connections on Wall St., and a direct line to Alan Greenspan who, ultimately, got some big New York banks to bail the suckers out. Lesson: "There's no guarantee that the fund company...has the mix right." For sure. He might also have mentioned that differential equations for juggling risk don't tell you not to deal with guys in Russia whose neckties look like bad upholstery (they ultimately defaulted on their debts to LTCM) and don't believe in math when the real world changes (the brains got their assumptions wrong). But the lesson could not be clearer. Diversify, diversify, and diversify. And then, preaches Mr. Bell, get yourself some bonds to stabilize your portfolio when the stock market goes to hell.
My only beef with Mr. Bell's wonderful book comes at the end when he recommends a list of funds that are great today, but that may turn into financial turnips tomorrow. Forget the list, though it's currently meritorious, and remember Mr. Bell's golden rules of investing: spread your money out, avoid what you can't understand, be a cynic about all things you are told, and keep your fees down. What the salesperson and the fund wholesaler and the fund vendor and the hired manager get, the investor doesn't.
Better than this Dummies version of Mutual Funds for Canadians, it doesn't get. Even sophisticated fund investors, the ones who know about the tendency of markets to equalize returns, the ones who know how to use dynamic asset allocation (sell the year's sectoral winners, buy the year's sectoral losers), can find instruction and good stories in it. Buy the book. Give it to your friends. And read it over and over. It's that fine.