The death of Jack Tindale’s* wife after almost 50 years of marriage affected the 74-year-old retired executive in more ways than he expected. Following the advice of his children, he continued to maintain a townhouse in Ottawa and a condominium in Florida, where Tindale and his wife had spent many winters. Their friends in Florida, Tindale and his children knew, would provide the support he needed to counterbalance the nostalgia and depression he felt over the absence of his wife.
In fact, the only substantial change Tindale made was to alter the way he managed his RRIF. He and his wife had made their own investment decisions, using a discount broker, and he had valued his wife’s suggestions and opinions. Without her participation he lacked the will and confidence to continue making these decisions, and transferred his RRIF account, which now included assets in his wife’s RRIF, to an independent investment broker.
“I want a balanced portfolio,” he instructed the advisor before leaving for Florida in January, “with about 70 percent in bonds or some other income-producing investment and the balance in blue-chip stocks.” The advisor agreed, asked Tindale to sign a few documents, and wished him a happy winter in the sun.
When Tindale returned home in April and opened his statements from the investment dealer, he was appalled to discover that 80 percent of his portfolio had been transferred into deferred sales charge (DSC) mutual funds that had already lost more than 10 percent of their book value. Calling the broker, he demanded the mutual funds be disposed of and the money invested according to his wishes. “If you do that,” the advisor informed him, “you will be docked about $15,000 in sales charges.” Tindale was appalled. He hadn’t chosen the funds; the advisor did. Why should he pay a penalty for the advisor’s bad decision? He insisted that the investment company absorb the fees; the company refused, claiming that Tindale had no cause for complaint because the advisor had made a decision according to Tindale’s requirements.
Furious, Tindale contacted the Investment Industry Regulatory Organization of Canada (IIROC), created from the consolidation of the Investment Dealers Association of Canada (IDA) and Market Regulation Services Inc. IIROC’s mandate, according to the organization’s documents, is to “set and enforce high quality regulatory and investment industry standards, protect investors and strengthen market integrity while maintaining efficient and competitive capital markets.” Its vision (how did corporations function in the days before each had to have a vision?) is “(to) be known for our integrity, our transparency and our fair and balanced solutions. We aim for excellence and regulatory best practices. Our actions are driven by sound, intelligent deliberation and consultation.”
IIROC rejected Tindale’s complaint outright. “You authorized every trade processed in your account,” an IIROC enforcement officer lectured him, “including the purchase of mutual funds,” referring to the documents Tindale signed before leaving for Florida. With no evidence of a regulatory breach the case was closed, leaving Tindale with the choice of watching his ill-performing mutual funds continue to decline faster than the stock market or paying $15,000 to bail them out in the hope of locating more suitable investments.
IIROC appeared to have based its decision exclusively upon Tindale’s granting his advisor the power to select and purchase investments according to Tindale’s needs and situation. IIROC, like its predecessor the IDA, did not look beyond the granting of this authority to judge the suitability of investments chosen for Tindale’s portfolio. Tindale and millions of Canadians like him agree to such an arrangement because they perceive that advisors will base their decisions according to what is best for the client. They do not. Not all of them.
Commission-paid advisors, like the one assigned to Jack Tindale’s account, earn very little money from dealing in bonds, GICs, exchange traded funds (ETFs)* and similar investments, compared with the earnings they generate from DSC mutual funds with large management expense ratios (MERs), similar to those placed by the advisor in Tindale’s portfolio.
IIROC may have changed its name, its mandate, and its vision but has not changed its policy of essentially ignoring the suitability of investment decisions and actions taken by advisors. Once a client signs an agreement authorizing an advisor to make trades, most of the ensuing decisions are considered sacrosanct by IIROC.
It’s an interesting position. Imagine that a surgeon, treating you for a gastro-intestinal problem caused by your gall bladder, asks you to sign a release form authorizing a procedure to be carried out according to the surgeon’s perception of your needs. You agree and discover, after awakening from the anaesthesia, that the surgeon chose to remove your healthy appendix instead. Not only has your problem not been solved; you later discover that the surgeon earns more from an appendectomy than a gall bladder procedure. Can you imagine the surgeon’s action being successfully defended based upon your signature on a release form, and subsequently supported by a medical review board that claimed the decision had been made in your interest with your prior approval in principle and could not be criticized?
Investment industry defenders may claim that their decisions are hardly life-or-death issues, but this is true only to a point if you are age 60-plus and discover your RRSP portfolio has been devastated by inappropriate investments and heavy fees. Claims that IIROC may make about representing investor interests are, to say the least, subject to serious doubt. In a few instances, the organization has agreed that advisors of member organizations acted in defiance of guidelines, and actually recovered commissions earned by these renegades through their corrupt actions. When clients whose ravaged accounts were the source of funds from these unauthorized actions asked for their money back, they were told it had been transferred to the coffers of the IDA/IIROC to finance the organization’s activities and would not be returned.* Another analogy: Someone steals cash from your home, is caught and convicted, and the money is recovered. You ask the courts for your money. You are told, “Sorry, we need it to redecorate the courthouse.” That’s how IIROC works.
This policy is contributing to a reassessment of millions of Canadians regarding the wisdom of relying upon licensed advisors and full-service investment houses. Do-it-yourself investors make errors in their investment decisions, most of which can be avoided by following basic guidelines. But substantial savings in sales commissions and fees may offset to at least some degree any losses suffered due to inappropriate decisions.
If you cannot rely upon licensed professionals to always act in your best interests rather than according to the sales commissions they generate for themselves—and cannot expect either a sympathetic response or any effort to replace losses experienced through the actions of others—how much worse can things become by acting as your own investment counsellor?
Beware the Investment Wisdom of Kitchen Help
Some profitable investment decisions are based on wisdom and experience. Others are the result of luck and circumstance. And a few are the product of realistic expectations. Like this one:
Back in the mid-1990s, I purchased a few hundred shares of Nortel Networks within my RRSP. I knew a fair bit about the firm, foresaw the internet-based industry expanding at a rapid clip, and figured the company was well managed by prudent Canadians.
I was proven correct when the shares more than doubled over the next three or four years, topping $100 per share in early 2000. That January, during an annual review of my portfolio with my financial advisor, I instructed him to sell the shares.
He was incredulous. “Our analysts are setting a target price of $130 a share, maybe higher,” he said. “You could be missing out on some major gains.”
I agreed that I might, but I didn’t care. Two things were influencing me.
First, I had more than doubled my investment in a relatively short time. I don’t believe I am less greedy than the average Canadian, but it seemed to me that I had earned as much or more than might be expected. Besides, the higher the climb, the greater the risk of the price tumbling. Stocks always swing past their true value, which triggers a fall—known in the industry as a “correction,” as though an error had been made. My advisor believed the error was still sometime in the future. I was convinced, however, that the chance I might make more profit from the stock was speculation; the fact that I had already more than doubled my money was reality. I chose reality. If the analysts at my financial advisor’s firm were proved correct and I missed out on another $20 or $30 gain per share by year’s end, I wouldn’t regret it. I was guided by growth more than greed.
My other reason for selling was essentially instinctive but equally valid.
A week or so earlier, my wife and I were dining in a mid-priced restaurant not far from Bay Street in Toronto. Our table was not in a prestigious location; in fact it was adjacent to the busboys’ station, where empty plates and utensils were parked before being carried off to the dishwasher.
Midway through our meal, a waiter and busboy struck up a conversation near the stacked china littered with scraps of steak and vegetables. I wasn’t eavesdropping; it was impossible not to pick up their words.
“So,” the waiter said, “did you get those Nortel shares I told you about?”
“I got five,” the busboy said. “All I could afford at a hundred bucks apiece.”
“Shoulda got more,” the waiter lectured. “Way I hear it, they’ll be up to a hundred and fifty by summer.”
“You buying more?” the busboy said, hefting a tray piled high with dining detritus.
“Much as I can,” the waiter replied, turning on his heel and heading back toward the centre of the restaurant where Bay Street traders, analysts, and brokers were seated.
I have enormous respect for people engaged in the hospitality industry. Their working conditions include long hours, variable compensation, and frequent encounters with boorish customers. I also assume that serving staff and busboys are as intelligent and perceptive as average Canadians. But when the waiter and busboy began exchanging investment advice regarding a company that had scored dramatic increases in its value and represented almost 30 percent of the entire capitalization of the Toronto Stock Exchange, I feared the bandwagon was in danger of losing its wheels. By the time an insight into Nortel’s future value travelled from corporate boardrooms to waiters and busboys, the value of any investment opinion was already being discounted by the market.
I trust this will not set off a flurry of cards and letters charging me with insulting restaurant and kitchen staff as investment-illiterate dunces. It’s not true. I hasten to add that some of the most nonsensical investment ideas I’ve ever heard emanated from the fallow minds of retired teachers, aggressive business executives, and headscratching academics. It wasn’t the wait staff ‘s occupation that tripped a red light in my mind. It was the gap between those who honestly know what’s going on and those who think they know. My financial advisor had been saying the same thing as the waiter and busboy, and I figure he’s right maybe 55 percent of the time. The restaurant staff ? Gotta be less than that. Much less. It was my cue to get out, and I did.
Within a month, the price of Nortel stock began to drop, taking tens of thousands of jobs with it and the retirement dreams of at least as many investors. I experienced no schadenfreude watching the long painful slide of the shares to penny-stock status, nor any pride in my decision. I just recalled the wisdom of a loving aunt who cared for me as a young child and deflected my craving for a new toy or new item of clothing by saying, “First, be satisfied with what you have.” Any time you have been fortunate or clever enough to double your money within two or three years, be satisfied with your success and move on.
This is one place where buy and hold no longer applies. In its place, think, “Buy and, when the price doubles, sell half.”
The Small Lie within a Larger Truth
My book Free Rider: How a Bay Street Whiz Kid Stole and Spent $20 Million opened my eyes to some realities of the investment industry I had not been aware of earlier. One was the gap between how much the industry understands about investing and how little the vast majority of investors know.
The investment industry justifies its fees and commissions by bridging this gap. That’s a reasonable basis for operating a business. I have no idea how the automatic transmission of my car works, let alone how to dismantle and repair it. If something goes wrong with the transmission’s innards after the warranty expires, I pay to have it repaired. Part of that cost will reflect the transmission mechanic’s training, expertise, and experience. And if the mechanic tells me why the problem occurred and how to prevent it from happening again, I’ll listen closely and take the advice seriously.
The differences between an automobile transmission and your RRSP portfolio are obvious and extensive. The expectation of receiving value for your money, however, should remain comparable. Sad to say, it’s often not.
Should you religiously follow the guidance of your advisor and discover that, instead of providing clear direction about investing conservatively and practising caution, the advisor’s actions have produced losses dramatically in excess of the overall market, any concerns expressed by you will receive the response “all investment decisions involve risk.” If your losses are sufficiently catastrophic for you to seek legal action, through all the stages of consideration, arbitration, and adjudication the mantra will be rephrased as: When you choose to invest, you choose to accept risk.
True. But hardly valid.
Risk is everywhere. Hiding your money in your mattress involves risk. Sliding all your RRSP contributions into a bank account risks lowering its buying power due to inflation. Risk and reward are conjoined twins; the more you expect of one, the more you accept of the other.
Nobody gives away something for nothing. Nobody will give you more growth for your investment without getting something in return, and the “something” is increased risk. That’s a universal truth. But the fact that you must accept the loss of risk in your RRSP balance that mirrors the loss in a stock market is not true. It is an outright lie.
After spending more than a decade researching complaints of advisor incompetence, malfeasance, and outright manipulation of client assets for their own gain, I have found that advisors and their firms use the “investment involves risk” defence with remarkable success. It’s more than a maxim: It’s a Get out of Jail Free card that accompanies every advisor’s licence.
Here’s a truth rarely revealed: Risk can be measured to a remarkably accurate degree and, once accounted for, it can be balanced to neutralize or diminish the impact of disaster. You cannot completely avoid risk, but you can reduce it by controlling the extreme and unexpected rise and fall of stock market prices.
At Last—A Chance to Use Your High School Algebra
Your idea of measuring investment risk may be to read the newspapers, listen to commentators on TV news channels, absorb mutual fund promotional material, and talk to your friends. All well and good. But this is like hoping to become a fashion model by subscribing to Vogue. You may be immersed in the culture, but you’re removed from the reality. When dealing with risk and volatility, you need more practical methods, although they needn’t be as technical as those used by heavy-duty investment managers who probe, dissect, and evaluate risk.
Risk management is a highly skilled and very important profession, practised by PhDs and folks of lesser qualifications employing calculations as complex and precise as anything NASA uses. People you have never heard of, and likely will never meet, spend each working day performing calculations such as:
Rit – Rft = ai + bi (Rmt – Rft) + si SMBt + hi HMLt + eit
It’s not a formula for growing hair. It’s the basic calculation for the Fama-French Three-Factor Model, used to compare an investment portfolio with the market as a whole, weighing risk against return. For everyone who did well in high school algebra and wants to show off their retained facility, here are the components of the quotation. The rest of us will take a break to file our nails:
Rit is the return to portfolio i for month t.
Rft is the T-bill return for month t.
Rmt is the return to the CRSP value-weighted index for month t
SMBt is the realization on a capitalization-based factor portfolio
that buys small-cap stocks and sells large-cap stocks.
Similarly, HMLt is the realization on a factor portfolio that buys
high-BtM stocks and sells low-BtM stocks.
The si and hi coefficients measure the sensitivity of the portfolio’s
return to the small-minus-big and high-minus-low factors,
respectively. Portfolios of value stocks will have a high value for h,
while growth portfolios will have a negative h. Large-cap portfolios
will load negatively on SMB (si will be negative), and
small-cap portfolios will have a positive value for s.
I’m hardly suggesting that you or your advisor (if you have one) evaluate your portfolio’s risk and performance by using this formula. It’s here to demonstrate that investment risk can be measured precisely and, once measured, steps can be taken to avoid disaster. This tool, and the knowledge it provides, are set down here to belie the caveat that investors must accept risk and, having accepted it, are required to forgive their advisors for any devastating consequences of the advisor’s guidance.
The concept of measuring risk is hardly restricted to the investment industry. Engineers building a bridge, surgeons planning a procedure, and pilots filing a flight plan all weigh risk and make decisions accordingly. The method of measuring risk is different in each case, to be sure. For the bridge engineer, the primary risk may be a factor of time; if the bridge is expected to perform safely for 25 years, the risk can be mitigated by various design elements. For the surgeon, the main risk could be personal: Does that surgeon have sufficient training, experience, and facilities to perform the procedure safely? For the pilot, it may be a go or no-go decision: Is the weather forecast favourable? Does the aircraft have the range to reach the destination?
Whether it’s keeping you and your car from tumbling into a valley, flying you to Europe, or providing as much protection as possible for your retirement savings, all professionals employ the same basic fivestep guide to risk management:
1 Identify the risk: What can go wrong and when? Where will it happen?
2 Quantify the risk: How serious will it be? How widespread? How much will it cost to avoid or reduce it?
3 Measure the probability of each risk occurring: Is the likelihood high or low?
4 Evaluate the impact: How much damage will it cause?
5 Create plans to reduce the risk and/or the amount of damage: What can be saved, and how?
Finding the most effective way of maximizing the growth of your RRSP and minimizing the risk that it will be in the tank before you’re in the money involves using as many ways of reducing the risk factor as possible.
And here’s the kicker: Some of them start with you.
It’s Not Just Mechanical—It’s Also Personal
Few of us will build a sturdy bridge, perform life-saving surgery, or guide an aircraft through stormy weather. We rely on others better equipped in every way to perform these jobs for us. We cannot expect to rely to the same degree on those who are guiding us in our investment decisions.
To be sure, there are no absolutes in investment management. Saving 90 percent of your RRSP assets in a falling market is acceptable; safely flying passengers 90 percent of the way across the Atlantic is not. But your involvement in measuring and diminishing the risk to your portfolio can be far more active than your role as an airline passenger would be.
One way you can achieve this is by avoiding hazards that occur when greed overtakes wisdom. It’s not so much that the greed level among Canadians is high; it’s because basic understanding of investment fundamentals is so low. Here’s a good example:
Beginning in the 1990s, many financial advisors in Canada were bombarded by requests from clients about mutual funds. Usually they weren’t requests at all but demands: Put me into hedge funds!
Hedge funds are a specialized breed of mutual funds, supposedly limited to a small group of sophisticated and well-heeled investors who presumably can understand what the fund manager is doing with their money, and can afford to lose it. Some hedge funds require a minimum of $1 million to participate. With such investors, the funds are permitted by regulators to play fast and loose with investor assets, engaging in bewildering activities like short selling (betting that a stock price will fall, not rise), using derivatives (exotic investment creatures whose description and breeding habits would take another book this size to explain), and leveraging (borrowing money to increase the total investment made). Hedge funds are to normal investing philosophies as thoroughbred horse racing is to pony rides.
Through to the crash of 2008, when they were identified as one of the causes of the crash itself, hedge funds appeared to be making money at a pace that ordinary mutual funds and other investments simply couldn’t match. Thankfully, the majority of advisors informed their clients that they didn’t have enough money to invest in a hedge fund. The more astute advisors would respond by asking clients if they knew what a hedge fund was and how it worked. Almost none did, yet they were initially determined to invest substantial portions of their investment in one because hedge funds were “hot”—and they were “hot” because they appeared to be making some people an enormous amount of money.
Which was true. It is also true that, next to putting your month’s salary on the nose of a racehorse or mortgaging your house to buy a truckload of lottery tickets, there are few riskier investments to make than investing in hedge funds.
Ten years before the crash of 2008, Long-Term Capital Management (LTCM), a popular U.S. hedge fund that had scored dramatic earnings in the past, managed to lose US$4.6 billion in less than four months. This was a feat not even General Motors has been able to duplicate. Only the intervention of then–Federal Reserve chairman Alan Greenspan, who authorized a government-backed bailout, averted a potential collapse of the stock market and a likely resulting recession.
LTCM was not alone; it was merely the most dramatic. Other hedge funds collapsed in a similar dramatic fashion, some losing more than half their assets in less than a month. The reason: Hedge funds exploit risk. When the market is rising, leveraging permits hedge funds to score bigger returns, using borrowed money to inflate the assets. When the market drops, short selling* lets managers make money while everyone else is losing money. But no batter hits 1.000 in baseball, no hockey player gets a hat trick in every game, no ice skater lands a quad on every jump, and no fund manager knows where the market is heading with every trade. When hedge funds won, they won big. When they lost, they somehow lost bigger.
I count two lessons about reducing the risk of your portfolio here. One is a dramatic demonstration of the correlation between risk and reward. The other is subtler but also more universal: Never invest in something you do not understand. Almost none of those eager Canadians who demanded to put their RRSP or other investments into hedge funds could tell a derivative from a dermatologist.
There’s also a corollary: If your advisor suggests an investment vehicle whose nature and operation he or she does not or cannot explain to you, avoid the investment and give serious consideration to avoiding the advisor.
In his excellent book Sleep-Easy Investing, Gordon Pape tells the story of a 28-year-old man who decided he knew enough about investing to conduct some day trading with an online broker. Choosing to invest in a diamond penny stock (can you think of a riskier investment?), the man planned to purchase 7500 shares. Due to a slip of a finger on his computer keyboard, he entered 75,000 instead, a blunder that resulted in an $89,000 debit against his bank account instead of the $8900 he had expected. The amount, in his words, “seriously exceeded my net worth.”
It’s easy to see why. Unemployed for several months, his sole income was an employment insurance cheque. Why would an unemployed investment novice risk $8900 on a penny stock? I don’t know either.
The rest of his tale unfolded between disaster and farce. Realizing his error, he tried to have the stock purchase reversed. No dice, the brokerage said. But we’ll try to sell it for you. The sell order was placed, but there were no buyers for the stock, only sellers. He finally dumped the stock for a few pennies a share, then demanded that the brokerage replace his loss because it failed to recognize that he was unsuitable for buying such a large quantity of the stock. The brokerage, in the parlance of Bay Street, offered to buy him a kite.
You may see this as a classic example of refusing to accept responsibility for one’s actions. I would agree, but in this context it’s also a lesson in not venturing into areas where your risk vastly exceeds your comprehension.
Control Volatility with the 3-D Approach
You probably don’t understand hedge funds, and the Fama-French Three-Factor Formula may look like arithmetic salad to you. Relax. You can control volatility and reduce risk with a variety of tactics, some easier to grasp and practise than others. Start with a 3-D approach, which many find effective—and no, it does not involve sitting in a dark theatre wearing coloured glasses. The three Ds stand for discipline, diversification, and dividends.
Discipline is the most difficult to learn and apply, and may involve expensive lessons along the way. It requires you to treat your investments as tools. Unless you become sentimental over hammers or toasters, do not become emotional about your mutual funds, stocks, bonds, and other investments.
It also involves contrarian behaviour, which often means not following the herd. This idea appears difficult for many Canadians to grasp, which may explain our reputation as feckless investors. We enjoy being among people who think the same as us. Why should we buy when most others are selling and sell when most others are buying?
Here’s why: Because it’s a market out there. Sometimes it’s a jungle as well, but primarily it’s a market, which means that some people understand the true value of whatever is being traded more accurately than others.
Imagine a vegetable market flooded with people selling tomatoes. Now imagine that a blight is beginning to destroy tomato plants throughout the area, but not everyone knows about it yet. Those who possess this knowledge realize that tomatoes will soon not be available from local suppliers, so they buy all they can afford for their own use or to sell at a higher price when the blight hits in full force. The buyers may even pay a premium price for tomatoes, which leads growers who are unaware of the blight to sell every tomato they can pull off the vine.
If you’re a tomato seller unaware of the blight, you would probably join the crowd, pleased to sell your tomatoes at the current price. When news of the blight spreads, tomatoes will become scarce, and that’s when people who knew the true situation make the big profits.
Or turn it around: Word spreads through the market that a blight is killing tomatoes on farms everywhere in the area. Suddenly everyone wants to stock up on tomatoes, and they begin bidding up the prices, fearing that they will have no tomatoes to eat. Some sellers hoard their tomatoes, hoping the price will rise even higher. A few sellers, however, know that tons of tomatoes will soon arrive from a region where the tomato blight has yet to kill the plants. They sell at the current price before the market is flooded with tomatoes from elsewhere and the price collapses.
In each case, the inexperienced buyer/investor does not know where the risk resides. And in each case, following the herd guarantees a loss of some kind.
Convert those tomatoes into mutual fund units or corporate shares and ask yourself if you would have the courage and discipline to go against the crowd. Without it, the first of the three Ds won’t work for you.
Diversification is preached by almost everyone as a wise investment tactic. Applied to investments, it promotes the concept of dividing your money among different industries (agricultural, consumer products, financial services, mining, and so on) if purchasing stocks; it also advises branching out among different sectors and investment philosophies (large-cap, small-cap, precious metals, broad index, global markets, emerging markets/aggressive, conservative, valuebased, and so forth).
Dividends represent both a benefit and a guideline when selecting individual stocks for investment. A company with a long record of paying dividends is a stable and profitable operation, generating a stream of income. If a company has never paid dividends, or recently suspended paying them, why bother? Solid companies with a long history of paying reasonable dividends represent a wise investment, and always will.
Can you generate impressive capital gains from companies that do not pay a dividend? Yes, you can. Will two portfolios with dramatically contrasting styles of diversification achieve similar success in controlling volatility? Yes, they might.
Obviously, this isn’t a science, and it’s something less than an art. “Success” should be defined not by absolutes or ultimates but by acceptability. In this case, it would be acceptable to record losses measurably less than average in a bear market and gains measurably more than average in a bull market. If the market drops 40 percent, which it did in 2008, and your equity (stocks and related mutual funds) portfolio drops 20 percent or less, consider yourself successful. If the markets rise 12 percent annually in a bull market and your equities rise 15 percent, you’re successful on the other end.
Here’s an easy way to understand concerns over various risks to your RRSP, RRIF, and other portfolios, based on material provided by Keith R. Betty on his Shakespeare’s Investment Primer website (used by permission):
| ||||||||||
|
With the world still shuddering from the stock market collapse of 2008, investors with substantial RRSP balances whose planned retirement date is within sight are most concerned about a repeat of that disaster.
The solution is preservation of capital, which means holding on to whatever you’ve managed to accumulate so far. While many ways of accomplishing this are available, not all are practical. They include:
High-interest savings accounts. This is the same kind of account your parents probably told you to open as a place to deposit your babysitting earnings or weekly allowance. These accounts were suitable for that; they’re not suitable for RRSPs, especially going into the second decade of the 21st century, when they generate about as much interest as last year’s Hansard.
Treasury bills. Safe and secure, they’re like garages—a good place to park your money, but you wouldn’t want to live there. These days, you should avoid them for the same reasons you should avoid savings accounts.
Money-market mutual funds. A place to waste your money by paying other people to put it into treasury bills.
Preferred shares. Owners of preferred shares in publicly traded companies are first in line to receive (usually) fixed dividends, a privilege offered in exchange for not having any shareholder voting rights. They have drawbacks, the most notable being the inclusion of a redemption clause in some preferred shares. Redemption clauses are traps that permit the company to declare, “We’re buying back all those preferred shares and using the dividends to lease a new corporate jet,” or some other, similar proclamation. This weakens their appeal as a true fortress foundation.
Which leaves bonds.
*A pseudonym. Based on “Investors Must Watch Advisors,” by Ellen Roseman in the Toronto Star, March 22, 2009.
*For a detailed discussion of ETFs, see Chapter 5: Crisis-Resistant Investments: How Much Assistance Do You Need to Acquire Them?
*For details on these and other actions by the IDA/IIROC and other investment industry organizations that appear to favour advisors over clients, please see my book The Naked Investor : Why Almost Everybody But You Gets Rich on your RRSP.
*For a detailed explanation of short selling and other terms, please consult the Glossary on page 179.