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Investment Research

Articles in this series explain what the modern theory of investment means for your portfolio. Fifty years of solid research into investing has produced a well tested, proven theory of investment. No magic here: What's known is that the market is highly efficient, and that to earn a higher return you must take on additional risk. We will examine what this means for your portfolio, as well as look into some of the rare inefficiencies in the market, and how you can exploit them in the long run.

TFSA versus RRSP: Which ETF should I put in my TFSA?

Contributed by: martingale

Investing When deciding which account to use for which asset class, you should put Canadian equity ETFs in your TFSA, and US ETFs add well as bonds in your RRSP. Let's look at the reasons why, and some of the edge cases that arise where this advice is wrong.

Building A Globally Efficient Index ETF Portfolio (updated)

Contributed by: martingale

Investing Last year I recommended building your RRSP with low cost efficient global indexed ETF 's by allocating funds in your RRSP to index ETF's based on global market capitalization. In my opinion there isn't much more to say about equity investment--that's still what most people should do with their RRSP. However, it's time to update the data a little. What's the market cap breakdown look like in 2007? Also, there are three new low cost Vanguard index ETF's available to track foreign markets: VGK, VPL, and VWO. We'll have to revise our approach slightly to work out how to fit VGK and VPL in.

Building A Globally Efficient Equity Portfolio with Exchange Traded Funds

Contributed by: martingale

Investing According to modern financial theory capital is allocated efficiently to global markets overall. That is, the total market capitalization of both companies and countries is roughly optimal. This is the theory behind index funds that are weighted by market capitalization. The overall maximally efficient RRSP portfolio would be to hold a global portfolio of equities roughly in proportion to global market capitalization. How would one go about doing this in and RRSP in a cost efficient manner? In this article I'll look at the breakdown of global market capitalization and discuss the factors that would affect your own particular global equity RRSP allocation. We'll conclude with a list of Exchange Traded Funds (ETFs) that would suit this allocation, and the proportion of your portfolio that you could consider allocating to each of ETF.

Closet Margin Traders: Mortgage Loans and Stock Market Risk

Contributed by: martingale

Investing Most people believe that buying stocks on margin is a silly thing to do: Everybody knows you might get a margin call that turns your heavily margined position into pocket change. The guys who jumped off buildings in the 1929 market crash were mostly margin traders--not smart, right? You'd never do that, right? Yet many of you are closet margin traders! You've mortgaged your home to the hilt, and you've risked the borrowed money in the equity market. You pretend it isn't margin trading, but it is: You are taking on the same risks that sent people hurtling from buildings in 1929. This is a wake up call: Please understand the risks you are taking. This is an especially urgent call at a time when many suspect we're in the midsts of a real estate bubble.

Foreign Asset Allocation in your RRSP

Contributed by: martingale

Investing How much money should you invest in foreign markets? A recent study in the Journal of Finance examined the extent to which mutual fund investors tend to put their money in their home country. This is called domestic bias. In every country, investors are biased towards investing in their own country. In this article we'll look at the market capitalization of global markets, and discuss how much money you should invest overseas. Given that the Federal Govt. just eliminated the foreign content restrictions in RRSP's, it's a good time to review your global asset allocation!

Trading Shares Over Coffee

Contributed by: martingale

Investing The original stock markets evolved from coffee houses where investors would meet and swap paper over coffee. Gradually, as volumes grew, the participants at the coffee tables became agents for others. Eventually, the coffee houses were replaced with full scale trading floors which evolved into the sophisticated web-based trading systems we use today. Well, you can still do it the old way, and I sometimes do. It's a slow, somewhat painful process which instills (in me anyway) a sense of nostalgia and history. Trading shares directly over the table with family and friends can save you a little money (no transaction costs!) and it can be fun.

How much US dollar investment in your RRSP is too much?

Contributed by: martingale

Investing A reader recently wrote asking whether the allocation of ETF's I recommended in RRSP Foreign Content Rules Scrapped overweighted investment in the United States--wondering in particular if perhaps there is risk that the US dollar might be devalued soon. How much foreign content should you hold in a self-directed RRSP?

RRSP Foreign Content Rules Scrapped!

Contributed by: martingale

Investing Suddenly I love our Finance Minister. Effective immediately the foreign content restrictions on RRSP's have been eliminated. This is a huge and wondeful change: You can now own as much United States, European, and overseas content as you like in your RRSP.

So how much should you buy? This article will take a look at how you should structure your investments under the new rules.

Picking Stocks: Avoid What You Know

Contributed by: martingale

Investing Many people think that you should only invest in the things you know well. Famously, Peter Lynch wrote in books like One Up On Wall Street that you should be able to pick great stocks by reflecting on things you see in your job and in your daily life. Accordingly, computer programmers tend to invest in software firms, doctors in drug companies, and bankers in financial services, each believing that their expertise in their industry will help them earn an improved return.

It sounds like common sense, but it's dead wrong. Investing in what you know is the last thing you want to do. To understand why, we will have to think a little on the nature of risk.

Past Performance of Mutual Funds and Stocks

Contributed by: martingale

Investing Will a mutual fund that has been a winner for the last five years more likely be a winner next year? Will the stock of a company that has been rocketing up for the past few weeks continue its ascent? Will returns in an S&P-500 index ETF over the next twenty years be roughly what it has been on average over the last hundred? Absolutely not. The past performance of a fund, stock, or even stock market as a whole is no indication of the future return.

It's not just some lawyer's disclaimer that you can ignore,"Past performance is no indication of future returns" is a fundamental principle of investment. In fact, good past performance is more often associated with poor future returns, for reasons that go to the very heart of the theory of investment. In this article we'll explore what you can learn from looking at historical data, and what you can't. Let the buyer beware.

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