Category Investing Early

Saving & Investing for Kids

What is Your Return on Investment?

Paul - The Wry Eye Guy 1 Comment

What is CAGR? And how does that compare to TWRR & MWRR? Isn’t it all just about the gains on your investment at the end of the day? How should you measure the performance of your portfolio?
We typically start out looking at the “profit” (or loss!) on our investments. We like to see that our portfolio is in the black. However, that isn’t enough. Being up 50% is always good. But it’s better if we’re up 50% in a fewer number of years.

CAGR (Compound Annual Growth Rate)
CAGR is one of the simplest measures of annual growth. You toss a bunch of money into the market & check its value after a few years. You use a little formula that tells you what the average annual growth rate was over that period. Your investment may have bounced up & down during that time, but CAGR gives you one easy number to look at. It’s a simple way to compare the historical performance of one investment against another. You can even calculate the CAGR of your house appreciation. Or you can use an online calculator like this one here. If you bought your house for $100k twenty years ago & it’s worth $300k today, your house appreciated at an annualised rate of about 5.6%. Now you can compare the returns on your house against your investments in the stock market!
But this only works for static investments. If you have cashflows, in or out, the numbers get thrown off & CAGR may not be so useful.

TWRR (Time Weighted Rate of Return)
TWRR & CAGR will be the same if there are no external cashflows, either into or out of the fund. In the real world, money is moving in & out of funds all the time. So fund managers & portfolio managers use some fancy math to calculate the TWRR to show the comparative performance of their ETFs. They use TWRR precisely because it eliminates the effects of the those cashflows. It’s trying to come up with a number that’s like CAGR, but for a portfolio that changes all the time. Because of this way of calculating return, TWRR makes it easy to compare funds against each other & against benchmarks. It only compares the performance of the investment choices. It doesn’t look at the return impact of funds flowing in & out.

MWRR (Money Weighted Rate of Return)
While TWRR eliminates the effects of inflows & outflows, MWRR deliberately looks at the impact of the size & timing of those cashflows. It wants to show the positive & negative impacts of when we add or remove money from a portfolio. The size & timing of the inflows & outflows means that the TWRR & MWRR percentage returns can be different. Sometimes significantly. An investor who moves money in or out will have an MWRR that is different from the TWRR for the same portfolio. If our investor times the market right & invests a large amount at a market low during the measurement period, his MWRR will be higher than his TWRR. And it should be, he got it right & made more money. That’s why it’s call Money-Weighted. The end value of his portfolio will be bigger as a result. The investor who sold some shares at the low is at the other end of the spectrum. He sold low, lost some money, & there was less money left in the portfolio to benefit from the recovery going forward. His MWRR will be much lower than the other guy. As will his end portfolio value. MWRR shows those differences on an annualised return basis. Since it’s removing the effects of cashflows, the TWRR for both investors will be exactly the same. But I know whose shoes I’d rather be in!

What does it all mean?
Remember that TWRR removes the influence of cashflows. It only shows the performance of the investment choices. In other words, both our investors made good investment choices (assuming they were beating the market!), but they managed their cashflows differently. And MWRR shows that difference in performance because of that cashflow management feature of the formula. The loser sold at the wrong time & had less value left in the account to benefit from the subsequent growth. His MWRR was lousy. The other guy bought more at the right time & he had even more money in play to capitalise on the growth that followed the market lows. His MWRR was great.
And no, it can’t help you time the market going forward. It just shows how well, or how poorly, your crystal ball worked in the past.
If no money moves in or out during the measurement period, CAGR, TWRR, & MWRR will all be the same.

About 6 years ago, the CSA (Canadian Securities Administrators) implemented guidelines for portfolio managers to provide performance reports based on MWRR for their clients. While fund managers need to use TWRR for real world comparison purposes, the MWRR is more real for individual investors. For DIY investors, some brokerages have performance tools that will show you both TWRR & MWRR over different timelines. When you are reviewing your performance, it might be good to know what kind of returns you’re looking at. Check out the performance tools on your brokerage account. Or, if you have an advisor managing your investments, talk to them about how your returns are reported.

Knowing the TWRR of your own portfolio is great for comparing the performance of your choices to that of an index fund or any other strategy ETF you think might be suitable for you. If you’re putting in hours of work & worry trying to beat the market, this metric might help you decide if it’s been worth all the extra effort. If you sat on some cash in the past, maybe waiting for an opportune crash to invest, the MWRR may help you see how well (or poorly) the timing of your money decisions worked in the past.
On the other hand, if you are happy with your portfolio’s TWRR & are investing small amounts regularly, you probably don’t need to worry about the MWRR deviating too much from that.

Of course, these are just a few ways of comparing performance. When it comes to investing, we all have our behavioural characteristics too. It might not be that we want to chase the highest return. There are investors who will sacrifice some growth in favour of lower volatility. Some favour investments that throw off dividends & distributions. We all have different tolerance levels for fixed income investments. And so on. But knowing the TWRR & MWRR on a portfolio can add something to the evaluation mix for us too.

If you want to learn more about all this from the ground up, I’d like to suggest that you check out Double Double Your Money, available at your local Amazon store.

Important – this is not investing, tax or legal advice, it is for entertainment & educational purposes only. Opinions are my own, so do your own due diligence & seek professional advice before investing your money.

Canadian Banks for Dividend or Covered Call Income?

Paul - The Wry Eye Guy 1 Comment
Dollars & Dividends

We love our dividends in Canada. If dividends are so great, why not go for the even greater yields available with covered call ETFs? Maybe we can toss all our investments into covered call ETFs & retire early? That sounds great!
But does it work?

Maybe!

Every investing strategy has its fan base. But at the end of the day, it all comes down to how the numbers work for the individual investor. And covered call ETFs can work for some investors.

However, some features of covered call writing can be less appealing. The notion of covered call ETFs having lower volatility, for example, may be true. But volatility is a measure of an investment going up, as well as down. In general, covered calls will limit upside. If a growing stock is called away, you lose some of the upside. As investors, we don’t mind volatility if it means our investment is going up. We only fret when it goes down. Hand in hand with that is the idea that covered call writing offers some downside protection. You’ll notice the wording in the description of many funds says something like downside protection may be limited to the returns provided by the covered call premium. That’s marketing speak for “we can crash as hard as anything else but you’re at least getting that juicy covered call premium along the way”. Unfortunately, during times of growth or recovery, the capped upside often means that the growth of a covered call fund doesn’t match that of a fund holding the equities directly.

Let’s take a look at an example using only Canada’s big banks. The five largest banks in Canada all started paying dividends in the 1800s. That’s a little too far back to look at, but if you’d invested $100k in an equal-weight holding of the Big 6 banks back in January 2000, that portfolio would have grown to almost one & a half million dollars today! Investing in the large cap American or Canadian market index funds would only have returned under half a million over that time. Of course, nobody would risk going all in on just the Canadian banks. Right!?! But this kind of performance is why Canadians like their banks.

To compare the different investing strategies, I’ll use BMO’s ZEB & ZWB here. Both ETFs are designed to track the Solactive Equal Weight Canada Banks Index. And both funds are managed by BMO Global Asset Management, one of Canada’s largest ETF providers. ZEB just holds the banks. ZWB holds the same banks, but adds a covered call strategy to about 50% of the portfolio to generate a bigger income stream. These ETFs have a relatively short shared history, so we’re only looking at returns over an 11.5 year period up to the middle of this year here.

Accumulation
During the accumulation years, all dividends & distributions are reinvested, that’s the “DRIP ON” scenario in the table below. This shows the Total Return, with dividends reinvested, from a $100k investment directly in the bank stocks. And it compares that to the same $100k investment in ZEB & ZWB.

It’s probably no surprise that directly investing in the stocks produced the greatest return. The direct investment was rebalanced semi-annually, to match the index tracking guidelines used by the ETFs. While ZEB does all that work for us, the fees charged by the fund cause a little drag on the returns. Since covered call writing lops off some of the upside potential, it’s also not a surprise to see ZWB trailing the pack here. It’s CAGR & Best Year are poorer. But, it’s worth noting that it’s Worst Year is slightly worse than the other two. Fund managers do warn that covered call funds “may” provide downside protection. Sometimes, that might only be by the amount of the covered call premium. But it’s not a guarantee. Since ZWB had the biggest drop of the three, the covered call strategy didn’t provide much of a safety net during the covid crash of March 2020. It’s possible that longer periods of sideways, or slightly down, markets could have allowed ZWB to produce a better relative performance. All in all though, it’s a pretty good performance for all strategies. That’s the accumulation picture. Next we’ll look at what happens when we start spending the income.

Spending the Money
Things change when we retire & need to spend some of our savings every year. All sorts of new challenges come up. The ideal scenario for many retirees is to have their investments generate enough dividends & distributions for them to live on. No worries about having to sell shares in a down market, & so on. Here’s how these three investments deliver on the income front.

This table shows the picture for an investor who retired in 2012 & sucked out all the dividends & distributions for living expenses along the way. The holder of ZWB would have had more income over the 11.5 year period. Though overall, perhaps not the best value, since the value of the underlying portfolio didn’t grow as much as the other two. If an emergency situation forced the sale of some shares to raise capital, the other two approaches had far bigger portfolio values to draw from. Aside from the income, the positive thing about all these results is that the underlying assets continued to appreciate. All these ETFs show positive CAGR. And this is with all the dividends & distributions taken out. BMO’s limited covered call strategy, over this timeline, worked well. Any income investment that shows negative CAGR for the underlying assets (with DRIP off) might be an exposure for a retiree with a longer time horizon. The portfolio value would decline over time & that will have an impact on the income stream over the long haul too. There is one other exposure here & that is the impact of inflation. If we adjust the End Value of the portfolios in the above table, the Big 6 & ZEB are worth an inflation-adjusted amount of about $150k. The End Value of ZWH, in 2012 dollars, is just under $95k at the end. This isn’t quite accurate, as the inflation adjustment comes from US inflation data, not Canadian. But it still shows the importance of having a portfolio capable of staying ahead of inflation.

Here’s what the income streams look like for these investments …

While ZWB starts out with a far greater annual income than the other two options, it shows more variability than the other two. Variability of income from year to year can be an issue for some retirees. Perhaps more importantly, the other income streams are catching up as time goes by. Direct investing shows a more consistent upward trajectory, even without any additional investment or DRIP. And this is exactly what you’d hope for with a portfolio of dividend-growth stocks. The dividend growth is what grows the income stream. That can be very important for an investor with a longer expected time horizon in retirement. Early retirees should watch out for this.

The Canadian banks generally do well over time. For portfolio growth & for growth of income. But now it’s down to personal choice. Do you prefer to trade some long-term portfolio value for the bigger income stream of the covered call approach early in retirement? Or do you like the more consistent growth of the income stream that comes from a portfolio biased towards dividend growth? There are a lot of factors that go into individual decisions. For a young investor with a long time horizon, total return is probably going to be more important than the size of the income stream starting out. It might also be more important for an early retiree. Or for a healthy retiree with a longer life expectancy. Things like leaving an inheritance, planning for home care or a retirement home, & so on, all factor into the decision making process too. Regardless, the Canadian banks have been a pretty solid investment over time & they look good in all these scenarios. Of course, as you’ll find noted on every fund’s webpage … past performance is not indicative of future results! We can’t just assume an investment will continue to do well in the future because it’s done well in the past. The banks have been great performers historically. But not all stocks or funds perform as well as the banks did here. Be sure to compare your choices for total return & income growth. And not just the size of the yield!

If you want to learn more about all this from the ground up, I’d like to suggest that you check out Double Double Your Money, available at your local Amazon store.

Important – this is not investing, tax or legal advice, it is for entertainment & educational purposes only. Opinions are my own, so do your own due diligence & seek professional advice before investing your money.

Women Suck at Investing

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The title is clickbait, please bear with me & I will try to redeem myself. If you do an internet search with that same title in the search box, what you’ll find is a series of links to pieces & papers that suggest exactly the opposite is true. Women, it turns out, are generally better investors than men. Guys seem to run on testosterone-addled brains that make them do silly things when it comes to investing. So women who are investing generally outperform men. However, this is not about which gender makes for a better investor. It’s about those women who are not saving & investing for their long-term financial security.

The challenge for women as group is that fewer women are investing, as a proportion of their gender population. Those women who are not saving & investing may have exposure to greater retirement challenges. Women are more likely to face poverty in retirement than men. There is a gender pension gap that results in a great number of women surviving on lower income in retirement.

Despite all the progress with gender equality over time, it’s just not enough. There are still glass ceilings that women butt up against in the workplace. Many companies pay women less than men for doing the same job. Some women are channeled into lower paid & temporary or part-time jobs. And women tend to be the ones that take career breaks to raise children. All these things lead to a lower lifetime income. And lower lifetime income can lead to a lower retirement income from savings & pension plans, including the Canada Pension Plan, for women. With women living longer than men, this only adds to their challenges for retirement. Women, on average, will need a bigger retirement nest-egg than a man, to take them through that longer retirement phase. And many women are not saving & investing enough, early enough, to counter that predicament.

While women continue to work on fixing all those other issues of inequality, saving & investing should be a priority from the earliest working years. Don’t trust your neanderthal male partner to do it for you. We’re not that good at it! This is one area where women can seize the advantage. By starting early. Given enough time, an early start can level the playing field.

Why do I care? Because my wife is likely to outlive me by, not just years, but decades. For some of us, the challenges only come to light much later in life. And I have kids, including a daughter. I’d like them to get started early too. I wish I’d known more in my younger years.

Unfortunately, the kind of people who are reading this stuff are probably already engaged & knowledgeable. You are likely already saving & investing towards a more secure financial future. But if you have friends who are not, please encourage them to start. Investing looks like a digital casino to those unfamiliar with it. But it doesn’t have to be. And, as I’m sure you know, it’s not so intimidating once you take the time to learn a little. Please share your knowledge with those who might benefit from it. And if you have kids, regardless of gender, help them get started on the path early. Unfortunately, the urgency to get started early only becomes obvious much later in life!

If you want to help a friend get started, encourage them to read Double Double Your Money.

Important – this is not investing, tax or legal advice, it is for entertainment & educational purposes only. Opinions are my own, so do your own due diligence & seek professional advice before investing your money.

Investing is Like Shopping

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Ever been in a lineup at the grocery store & switched to another line because it’s moving faster? Then the shopper ahead of you has their credit card declined! Most of us have done it, eh? And it’s a total crapshoot as to whether we win or lose. That makes it gambling. But it’s a gamble with little cost if we lose. And the elation of the occasional win makes it worthwhile. Many investors do the same thing, swapping stocks & funds based on which one is doing better recently. But when it comes to investing, we don’t always get to see the results right away. The reality is that reduced returns are more likely with this kind of behaviour. And this can have a negative impact on our financial well-being over the long haul.

There are few, if any, guarantees when it comes to investing. But chasing today’s hot stocks, sectors, ETFs, or markets usually results in underperformance. Today a growth strategy is the winner, next month it might be value, then it’s the turn of small caps, or emerging markets, & so on. But for most us, chasing what’s hot today usually doesn’t work that well.

For many DIY investors, a single, well-diversified fund or ETF is probably a better choice for the core of an investment portfolio. It might serve most of us well over a lifetime of investing. Buy that one fund & you buy everything at once. A young investor with an appropriate risk profile might go with one of the all equity funds like XEQT, VEQT, or ZEQT. An older or more risk-averse investor might choose one of the all-in-one funds that hold a bond allocation. The VGRO, XBAL, or ZCON (CNS) type funds from one of the big providers in Canada fit the bill here. Is one fund enough? These equity funds hold somewhere around 10,000 companies, from across the globe. Yes, that’s enough.

But, but, but … the S&P 500 Index has clobbered these funds recently. And the Nasdaq 100 Index has done even better. The American indices have outperformed most other county indices over long periods of time. So why might you do that boring global diversification thing? You do it because nobody knows what happens next. If we were having this conversation at the end of 1999 & you went all in on the S&P 500 Index, you could have turned $100k into about $104k by the end of 2010. A lousy compound annual growth rate of 0.35%. And that’s with all dividends & distributions reinvested along the way. Eventually it all came good & this index went on to ever greater highs. But would you have stayed invested for 11 years while the index did nothing? Meanwhile, if you put that same $100k in XIU, the iShares S&P/TSX 60 Index ETF, it would have grown to over $200k during that same period. Over that decade or so, the Canadian market trounced the American market. Had you gone all in on the Nasdaq back then, your $100k would be worth less than $62k by the end of 2010. This usually hot index went down. A lot. Could that happen again? I don’t know, do you? Do you feel comfortable going all in on the S&P 500 or the Nasdaq now? How about going all in on that hot stock that your buddy made a killing with?

Even younger investors might want to give the bond component a look, by the way. Yes, I know bonds are boring, old-person investments. And bonds got walloped in 2022, so who needs them, eh? But look at it from another perspective. The oldest bond ETF in Canada is XBB, the iShares Core Canadian Universe Bond Index ETF. It launched in 2000 so we’ll use the data from January 2001 to the end of 2010 for comparison. While the American indices languished, XIU turned $100k into more than $179k over this 10 year period. While this boring bond fund turned $100k into almost $176k. A boring bond fund almost matched the performance of the Canadian index & it dramatically outperformed the American indices during this decade. A bond allocation provides further diversification & this is another example of what diversification is all about. You probably won’t make a killing betting on all the horses in the race, but it might help you keep the shirt on your back!

It all boils down to this … nobody can tell the future. Nobody knows what happens next. And, when it comes to investing, the less you know the broader you go. When you don’t know, diversification can help moderate the effects of crazy fluctuations in one regional market or another. While a series of catastrophic events could drag down all markets globally, there’s a decent chance that some regional markets will hold up better than others. That doesn’t mean that a globally diversified portfolio, even one with a bond allocation, won’t go down, it will. But unless you know something that nobody else does, or unless you get lucky, you might do better by covering more of the bases. These globally diversified & all-in-one ETFs do that.

Now if you really want to play with something different, it might be fun to allocate a small percentage of your portfolio to one of the hot funds. Or even to whatever stocks you think are part of the next big thing. You may even win big with this allocation & then you’ll frown at the pedestrian performance of your globally diversified ETF. But the thing to remember is this: portfolio performance is measured over decades, not over mere months or even years. The results of your choices might not be apparent for 10, 20, or even more years. The caution in this tale is to be wary of allowing short term or recent performance having too big an influence on your longer term decisions. After due consideration, you may still choose to focus more on the American indices. Nothing wrong with that. But do it with your eyes open. And with an appreciation for how things might work over longer time horizons. Investing really isn’t like shopping, it’s a long game.

If you want to learn more about all this, & how to build a portfolio that might suit your needs better, read Double Double Your Money.

Happy Canada Day! 🇨🇦🍁🇨🇦

Important – this is not investing, tax or legal advice, it is for entertainment & educational purposes only. Opinions are my own, so do your own due diligence & seek professional advice before investing your money.

Double Double Your Money

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I started pulling information together to help my kids save & invest almost 3 years ago & the end result is this …

Double Double Your Money was released on Amazon today.

It is a guide to saving & investing that primarily targets younger investors & those just starting out on their journey. That said, I could have used something like this at a much older age myself! It might also be a useful resource for other parents looking for some ideas on how to guide their own kids towards a saving & investing program. Like all Dads, I’m trying to prevent my kids making some of the mistakes I made. As parents, we know how that usually goes. But we’re parents, so we have to keep trying, eh!

While the broad principles apply in most places, the focus is on Canada, where we can tap the value of tax-sheltered accounts like our TFSA & RRSP. The Canadian CPP & OAS programs provide some support in retirement but there’s a lot more we need to do to for a comfortable retirement. In my twenties, I couldn’t even imagine thinking about retirement. Nor do my kids. So I cover some exciting things like getting rich, becoming a millionaire on minimum wage, early retirement, FIRE, & anything that I think might suck them into saving & investing sooner!

Not to worry, there’s no silly stuff here. I’m a little too conservative & risk-averse for that. And I worry more about losing my kids money than I do my own. But the importance of building a financial strategy as early as possible is a huge deal. I hope this works to get younger investors, including my own kids, motivated enough to get things going.

You’ll find it across most Amazon markets in Kindle & hardcopy formats, & you’ll find it in the Canadian market here.