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OMG!!! - Do people research their investments?

I look at the financial forums a bit, almost daily in fact. Initially I was looking to see if I could get any tips or insight into the market and various investments out there. But now, it’s simply turned into a curiousity and source of humour for me. I’m going to try not to rant about this too much … but no promises!

   My biggest question when sifting through these forums, is, do people on here even research anything they put their money into? I see a lot of comments that imply people chase dividend yields or hype, and have minimal understanding of what they put their hard-earned money into. They make comments that make me think they are highly sensitive to risk or (false) reward, or are operating on pure emotion in their investments. They complain after-the-fact, .. a lot!! A buddy of mine explains it this way, “it’s like buying a large 4x4 truck, then complaining about the fuel economy. What the hell did you expect?”. Why did you buy it to begin with? Was it only to look cool at the rodeo or cruising the strip? If you bought it for hauling stuff, you need to buy the gas. Bigger vehicle, more payload, equals more gas required? Did you miss this fact? Furthermore, do you think gas is getting cheaper in the future? You haven’t been watching the news for the last 5-10 years.

   Not every fund sold on the TSX or US markets works the same, nor does it have the same goals and objectives for investors. Some funds are there to chase high dividends, and some are there to chase capital growth, some are built to provide a tax advantage while others might be better suited inside a tax-free account, and some are simply a mix of different strategies that form an index average. They may follow one or several indices. They may focus on sectors only. They may be taxed very differently, meaning they work better in taxed or tax-free acounts. Some are constructed (e.g. retirement income funds) to help retirees decumulate their assets whilst recieving predictable returns and minimal capital appreciation/depreciation. Some are built to produce dividend yields way above what you would get by letting your money ride in single stocks. There are trade-offs in all of these products, and I’m sure there are thousands of funds out there with slightly different mixes, slightly different strategies, slightly different goals and objectives, slightly different records of success, and all trying to get your business.   

    But time and time again, I see people in these forums commenting, “why isn’t this (retirement) fund price going up?”, while all along this fund has an objective of paying out dividends plus capital returns (or losses) from selling off the underlying stocks that make up the fund. This is how they were meant to work, to make the returns more predictable and the decumulation strategy blended and easier for investors to execute in retirement. This is what you, as a retiree, should be doing anyways if you didnt have a fund doing it for you.

   Besides driving me a bit dingy, it scares me a little bit that there is an overwhelming demographic of these retail investors vested in products they don’t appear to understand, and pivoting on the cusp of a price target that may never materialize, or isn’t meant to materialize as fast as they think it will.

    I’ll use covered-call option funds to further illustrate what I’m talking about. If there is a fund made up of dividend paying banks that pays a dividend yield of 13%, while none of those same banks pay over 7% dividend and most are around 5%, how do you think they are making up that difference to pay you 13% in dividends? They are taking a pool of cash/stocks out of the fund holdings and implementing a cover-call investment strategy that supplements the true dividend yield with the premiums they earn from this method. In some of these funds the amounts they use can be anywhere between 30% and 50% of the total fund value. They buy new shares cheaper, set a call option at higher strike price, and sell them when and if they hit that target price. This strategy can and historically produces higher returns, but it trades capital growth for the premiums and the dividend can change based on the success of the fund manager/s. It can also miss on it’s strategy, as the options expire, then you get back whatever you put in, which could be less than where the price settled that day. The dividends from active shares plus these premiums give you the returns above what the shares would pay by only dividends in the market. If you are focused on high income returns only, it’s an acceptable trade-off. The fund price doesn’t move much while you get higher returns. Or if you practice a cover-call strategy yourself, letting someone else do it let’s you do other things. I have some of these, but I also have an idea how they work and that settles my mind when prices are bouncing around and not going anywhere.

   Yet I constantly read, “wow, why is this fund hit so hard today while all the bank stocks are going up”? Well, … that’s because that’s how it’s supposed to work! Or I read, “hang on and don’t sell, the dividend is still juicy compared to XYZ stock”. Well, … that’s how it’s supposed to work! Or I read, “why is this index fund only paying less than a 3% dividend”? Well, … that’s how it’s supposed to work!

                                 BUYER BEWARE (BE AWARE)!!!!

   You have to read the fine print, and you have to understand what you are buying, to achieve your objectives. If you buy into some of these funds thinking it’s all about the price going up (or down), or it’s all about the dividends, and it doesn’t happen, it’s your fault. You have to do your due diligence and you have to understand and accept the risk. You should be willing to settle for the fund objectives and not your own assumed and contradictory objectives. You must have a clear sight on your financial goals, either short or long term, employed or retired, high or low tax situation, capital or dividends focused, etc etc before you leap into funds. I see too many people playing the stock market like a casino, and while that might get you the odd win, it’s also going to get you the odd loss. And likely, much akin to a casino, it’s going to be the latter.


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