Investing On Auto Pilot By Robert Cable Options

[larryt]

This book was listed as a recommend reading by an Advisor, and I wonder if any of you have read it. It is called "investing on Auto Pilot".There is more information on the site and even the ability to read 1 chapter. The web site is

http://www.waterfordweir.com/index.php?page=home

Thanks for any comments on this.

[kcowan]

I have not read the book but I sampled Chapter 2 and here is my reaction:
1) It is a great tutorial.
2) I agree with him on bond funds and balanced funds, i.e. don't buy them.
3) I personally prefer commercial bonds and especially convertible debentures/preferreds. His assumption that one company out of ten will fail in 5 years in his illustration is highly prejudicial to his analysis. Plus this is a huge source of selection and diversification in fixed income that he just eliminates.

But then I don't know what assumptions are behind his autopilot scheme. Clearly buying corporates requires more work than buying CSBs. We have had great luck with Dundee Reit Convertibles at 6.5% purchased at issue in June 2004.

National Post Convertibles List

[belguy]

What about bond ETF's? Are these OK or are they in the same class as bond mutual funds?

[larryt]

I have not read the book but I sampled Chapter 2 and here is my reaction:
1) It is a great tutorial.
2) I agree with him on bond funds and balanced funds, i.e. don't buy them.
3) I personally prefer commercial bonds and especially convertible debentures/preferreds. His assumption that one company out of ten will fail in 5 years in his illustration is highly prejudicial to his analysis. Plus this is a huge source of selection and diversification in fixed income that he just eliminates.

But then I don't know what assumptions are behind his autopilot scheme. Clearly buying corporates requires more work than buying CSBs. We have had great luck with Dundee Reit Convertibles at 6.5% purchased at issue in June 2004.

Thank you for your reply....I will look into these.

[kcowan]

What about bond ETF's? Are these OK or are they in the same class as bond mutual funds?

To quote the author:

Take a look back to 1994 if you want to see a real example
of the dangers in bonds funds. There is no reason why you can’t
go out and buy directly the same 5% bond the bond fund holds,
and save the 1.65% yearly cost. And that, my friend, is precisely
what you should do.
We’ve already outlined how to manage a fixed-income portfolio
(laddered maturities, government-issued). As they say, this
isn’t rocket science. This is one instance in which unsophisticated
investors don’t need professional money management because
there is a simple, effective system to follow. Just buy the bonds
(CDs, GICs) directly and don’t do it through a fund.

So while an ETF is better because the MER is less than 1.65%. his point is the same. For example, let's say your retirement portfolio was $1 million with a 60/40 equity split. Then you would have $400k in bonds. If the bond fund MER was 0.5%, then you would be paying someone $2k/year forever just to avoid setting up and maintaining your bond ladder.

With an SWR of 4%, then you are paying them 5% of your annual budget to do this job for you. Buy his book and do it yourself. Or review what Mackay already told you here.

BTW convertible bonds are cheap now because of the market meltdown. Some like Extendicare are giving yields of 6.8%. When the author says these are too risky, I say: "Do you think Extendicare is going bankrupt?"

[mackey]

To quote the author:
If the bond fund MER was 0.5%, then you would be paying someone $2k/year forever just to avoid setting up and maintaining your bond ladder.

With an SWR of 4%, then you are paying them 5% of your annual budget to do this job for you. Buy his book and do it yourself. Or review what Mackay already told you here.

BTW convertible bonds are cheap now because of the market meltdown. Some like Extendicare are giving yields of 6.8%. When the author says these are too risky, I say: "Do you think Extendicare is going bankrupt?"

The way I look at it is.

1) When you buy small amounts of bonds, you pay a spread to the broker. This spread is smaller or non-existent when you buy ETFs or Bond Index funds.

2) When you buy ETFs or Bond Index funds, you in escence are buying a portion of a large basket of bonds and when one fails and moves to junk status, the hit is minimal. When you buy bonds directly, you can't afford to get the diversification that is equivalent in ETFs or Bond Index funds. So someone who bought BCE bonds (for instance) and one or two others would see a large chunk of their bond investment deminsh over-night.

For me....Bond ETFs and Bond Index Funds with low MERs is the way to go.

[belguy]

I own the iShares XBB ETF with it's MER of 0.5%. It's easy, it's simple, and I can live with the cost and that's the way that I like it. If I owned a ladder of bonds, I would likely hold just five bonds and I wouldn't know what commission I was being charged to purchase them. It's the same with equities. I hold mostly ETF's with a few managed mutual funds for small caps and emerging markets. That's more convenient to me than trying to buy individual stocks. I have read many articles endorsing this approach and I'm happy with it so please don't go around putting any doubts in my mind.

[kcowan]

The way I look at it is.

1) When you buy small amounts of bonds, you pay a spread to the broker. This spread is smaller or non-existent when you buy ETFs or Bond Index funds.

2) When you buy ETFs or Bond Index funds, you in escence are buying a portion of a large basket of bonds and when one fails and moves to junk status, the hit is minimal. When you buy bonds directly, you can't afford to get the diversification that is equivalent in ETFs or Bond Index funds. So someone who bought BCE bonds (for instance) and one or two others would see a large chunk of their bond investment deminsh over-night.

For me....Bond ETFs and Bond Index Funds with low MERs is the way to go.

It is really about yield. What is your after costs return? You can go to your bank and buy CSBs for free every November. After 5 years you have a nice ladder. And no risk.

But then the bond ETF might produce better returns at marginally more risk. But it is more risk...

[kcowan]

I own the iShares XBB ETF with it's MER of 0.5%. It's easy, it's simple, and I can live with the cost and that's the way that I like it. If I owned a ladder of bonds, I would likely hold just five bonds and I wouldn't know what commission I was being charged to purchase them. It's the same with equities. I hold mostly ETF's with a few managed mutual funds for small caps and emerging markets. That's more convenient to me than trying to buy individual stocks. I have read many articles endorsing this approach and I'm happy with it so please don't go around putting any doubts in my mind.

Two things:
1) We were talking about a book and what the author advises. Just stop reading if your mind is made up.
2) You know exactly what commission that you pay on every bond. Your return is quoted after any charges are taken. So you buy based on the known net yield in APR. It is comforting to know exactly what the total APR is going to be.

[belguy]

There is risk in everything! If you try to eliminate all risk by putting your money under the mattress, you risk losing any potential gains and the house might burn down torching your money along with it. If you stay in bed in the morning, to alleviate risk, a plane might crash into it and burn you to smithereens. Risk is a part of life and so are fees. The goal is to strike a balance appropriate to your circumstances. If you read enough, you will get all sorts of advice. That's why I am working to keep my investments as simple as possible for asset allocation and rebalancing purposes. The ultimate goal is to simplify into four ETF's to cover bonds, and Canadian, U.S., and International equities. If I was starting a portfolio today, this is how I would set it up and then sit back in my easy chair and watch that portfolio beat 80 percent of managed money. I am willing to let others scramble and chase after the other 20 percent. More power to them!!! Now, if you will excuse me, I think I will go and purchase some more XBB units.

[Guest_rover1_*]

You pays your money, and you takes your choice!

[belguy]

Made my purchase. Feel good. Will sleep soundly tonight.

[Guest_The Wealthy Boomer_*]

I reviewed this book last week in my blog:

http://network.nationalpost.com/np/blogs/w...-autopilot.aspx

I'm doing a related piece on the idea of using high-yielding blue chip stocks as "bond substitutes." If any one has any ideas, please contact me via the blog.