Don't get me started on life-cycle funds…the newest product being touted by the money industry…a fund of funds which matures, they say, on an important date in your life. The average American mutual fund holds 160 stocks. Why would you want a fund of funds, says five times 160 = possibly 800 stocks? Talk about over-diversification! • Life-cycle funds are fatally flawed. They recommend that you switch to more bonds, with their fixed income, as you approach retirement¹. Retirement could last a couple of decades. If you own a lot of bonds, you could be destitute by 80. If your planner is flogging ideas like this, get rid of your planner. Think for yourself. “The complexity of the real world cannot be reduced to simple black-and-while formulas” Nassim Taleb, The Black Swan. • Life-cycle funds “allow you to plan your investments around key dates in your family's life” (ROB June 19 2007). But what if the market is down as the fund approaches maturity on your key date? Oh my! Yet, Clarington vice-president Eric Frape says “the big selling point of its life cycle funds is 'worry-free investing”. (ROB March 22 2007 Keith Damsell) Hello! Holding bonds does not keep stock prices from falling. • Life-cycle funds are fundamentally flawed. The selections are made by 'empty suits'. “There is very rich literature on the so-called expert problem”, Taleb maintains, “running empirical testing on experts to verify their record.” Economists, financial forecasters, stockbrokers, finance professors and financial advisors, don't fair well. An increase in their information does not lead to an increase in their accuracy. If you think experts in finance do better, read When Genius Failed: The Rise and Fall of Long Term Capital Management. LTCM had two nobel laurets at the helm. Their hedge fund had to be rescued by the Federal Reserve in 1998. In summer of 2007, Bear Stearns 'folded' two of their hedge funds. • Experts in this industy can't predict. Read what Nassim Taleb says about prediction in The Black Swan in Chapter 10 'The Scandal of Prediction' (page 146). In fact, Taleb maintains “The more information you give someone, the more hypotheses they will formulate along the way, and the worse off they will be. They see more random noise and mistake it for information.”. • If you hold more than one mutual fund fund, you are effectively indexing…owning hundreds of stocks. The S&P 500, one of the most famous indexes, hit a high of 1527.46 on March 24 2000. It did not hit that high again until May 30 2007. Look up what the S&P 500 is now. There were seven years of action with no progress. Do you want similar pitiable returns from your hard-earned retirement savings? Seven years without any growth from a select group of America's biggest companies. • Most likely the funds selected for you will contain non-dividend paying stocks²: not good. Between January 1996 and December 2006, Canadian non-dividend-paying stocks returned minus 2.3%. A whole decade and a negative return from stocks which do not pay dividends. Report on Business May 4 2007 John Heinzl • Life cycle funds are too dependent upon capital appreciation. Gains can be fleeting. • What do you do when 'the cycle' ends? Funds, even bond funds, are not noted for providing income.Cash flow is most important during retirement. When's there little income, you have to start eating into capital early on. Do the Math: 4% withdrawals eat into capital sooner than you think. • You lose control of your money. The 'experts' select the funds and they're not. When you know only a little about investing, say, and you know you know only a little, it's tempting to believe others know more: they may not. • Have you investigated the fines for terminating a life-cycle fund? Suppose, if the market really falls (Nasdaq dropped 78% from it's peak in early 2000…but they would not put you in tech stocks, would they?) and you wish to get out. Can you even get out? Is there a notice period for redemptions? Many funds are allowed to clamp down on redemptions if there's a flight to cash. • With life-cycle funds, the fees are higher. I'm certain this is why this merchandise was concocted originally in the States and why it's recently has been imported into Canada…to extract more money from you: life style funds are right some profitable…for the sellers. These people are masters in the art of extracting money from your pocket pocket.

• Connolly Report December 2005 p. 590: Life-cycle mutual funds (Age-Centric Investing, Forbes magazine, November 14 2005)

You might have noticed Fidelity's recent (Fall 2005) advertising campaign. The huge American financial conglomerate, is trying to convince Canadians to buy into their ClearPath retirement portfolios. They've created another new product to generate additional fees. ClearPath, Fidelity says, adjusts your mutual fund investments automatically over time. When you are younger, more is put into equity (ClearPath 2045 is 85% equity). They say “Growth opportunities² are maximized early on”. As you get older, Fidelity drops the portion in stocks and increases the money in bonds. In retirement, Fidelity would have you in 35% bonds, 30% equities and 35% cash. Can you imagine! Fidelity calls it “becoming more conservative as retirement approaches”. I think its dumb to give up dividend-paying common stock which provides a growing income, in order to buy a bond with a fixed claim payable in steadily depreciating dollars. And to be 35% in cash…hello! Is it wise to have significant holdings of bonds in retirement? Bonds are fixed income instruments. Could your retirement last 18 years? In the 18 years Greenspan has been Fed chairman, the value of money has been reduced by 50%: cut in half in just 18 years. I don't want fixed income. Think inflation.

Alternatively, common stocks with pay and grow their dividends can provide a growing retirement income. That's what I do. I bought my common stocks with growing dividends years ago and now earn double-digit yield on many of them. ¹ If you go into retirement with dividend growth stocks bought years ago, the income from them will most likely be higher than that of bonds at your retirement date. And it will be a growing income during retirement. If you were nervous about stock prices at that point, you could sell enough of your dividend growers to get your money back and then, with the rest, you could not lose. Here's a final thought on bonds. One of the major causes of stock prices falling is rising interest rates. If interest rates rise, what happens to bond prices? Yep. They fall. So, stocks and bonds could be falling at the same time. And they people think bonds are safe! Bonds fluctuate in price too. “Treasurys [bonds] are no more inherently safe than stocks are inherently value-laden. Safety and value are qualities conferred not by the nature of an asset but by the price at which it is acquired” (James Grant, Forbes Oct 28 2002) ² “$1,000 invested in 1986 in the stocks that are 'dividend growers' would be worth $14,531 today, while it would be worth just $4,915 if you pumped it into companies that did not make these payouts.” Report on Business, July 13 2007 If I wanted a fund of funds, I'd buy common stock in a major company which peddled funds: IGM, for instance. ² Don't buy stocks which don't grow their dividends for your retirement, no matter how tempting 'the story'. Here some data [unfortunately American] from Ned Davis Research: from 1972 thought to 2006, dividend growing stocks returned 11% a year, non-dividend payers returned 2.4% annually. WOW! What a difference, eh!

Talking about retirement and life style, here's a wee smile called “The Inheritance” When Dan found out he was going to inherit a fortune when his sickly father died, he decided he needed a woman with whom to enjoy it. One evening he went to a singles bar where he spotted the most beautiful woman he had ever seen. Her natural beauty just took his breath away. “I may look like just an ordinary man,” he said as he walked up to her, “but in just a week or two, my father will die, and I'll inherit 150 million dollars.” Impressed, the woman went home with him that evening. Three days later she became his stepmother.

My sister Margaret, who teaches at Ryerson, would say , “Thomas, women are so much smarter than men.”. She has a Ph.D. I just have a B.Comm.

“Treasurys (government bonds) are no more inherently safe than stocks are inherently value-laden. Safety and value are qualities conferred not by the nature of an asset but by the price at which it is acquired.” James Grant, Forbes, Oct 2002