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A Second Pure Bitcoin Security
I just bought some CXBTC, an indirect investment in Bitcoin, trading in a regulated market (Sweden). My rationale, Grayscale’s competing security GBTC has been trading at a ridiculous 50 to 60% premium to the underlying value of Bitcoin. This premium may be reflective of the difficulty investors have in speculating on the value of Bitcoin in regulated markets. Hopefully, CXBTC will attract some premium until additional similar securities begin to proliferate and premiums dwindle.
Fintech
Fintech, or finance technology, seems to be getting increasingly more attention. A recent Reuters page explains many of the terms currently being bandied about. The page is aptly titled, Fintech lingo explained. Enjoy!
Simple Six Update
It’s been over 6 months since the Simple Six was first offered as a portfolio for consideration. So how has it done?
Well, here are some results. First, and most importantly, the portfolio’s return since March 10th was 6.16% as of this morning. With a ‘balanced’ portfolio like the Simple Six, we can expect that not all components will provide the same return. In fact, one would hope that the returns of the various components are uncorrelated, meaning that there should be relatively high probability that when one component decreases in value, there are other components that increase in value (hopefully, by more than the decrease).
So, the one component that experienced a decrease in value over the last 7 months was the Vanguard Canadian Short-Term Bond Index (VSB). It decreased by just under 0.5%. The best performing component for the period was Vanguard FTSE Canada All Cap Index ETF (VCN) with a return of 9.7%. Another good performing component was the Vanguard Total World Stock ETF (VT), coming in at 7.7%. The remaining 3 components generated between 1.3 and 4.9%.
Basics of running your finances
I came across an article on Bloomberg describing the “basics of running your financial life” and thought I would share it with you. It uses some US-specific terms. Just replace “401(k)” with RRSP and “Roth 401(k)” with Tax-Free Savings Account (TFSA), and you will have a Canadian version.
If you’re carrying credit card balances or have outstanding lines of credit on which you are paying non-tax-deductible interest, then paying off these debts (in order of decreasing interest cost) would be a substitute for #1 until those debts are eliminated. I would slightly reorder the priorities, so that #6 was actually at the top of the list.
The Rationale behind the Simple Six
Here’s some of the rationale behind the Simple Six portfolio.
As the investor’s expenses are expected to be denominated in Canadian dollars when the portfolio is liquidated, a large part of it is invested in Canadian dollar denominated securities. Recognizing that the Canadian economy is less than 3% of the world’s economy, I think its also important to diversify beyond Canada. Accordingly, a significant proportion of the portfolio is invested around the world, but particularly in the U.S.
The 1,100 bond (fixed income) units represent about 25% of the portfolio. I thought this proportion was about right given the risk-reward profile of the investor. These units are expected to have a relatively low rate of return, but they also carry a relatively low measure of risk. The fixed income portion of the portfolio is also diversified among corporate bonds and governement bonds. The largest fixed income component consists of short-term bonds, as I believe the probability of an interest rate increase is greater than the probability of an interest rate decrease in the next 12-24 months, and short-term bonds decrease less than long-term bonds in such an environment.
The largest equity investment is in 500 units of Vanguard Total World Stock ETF (VT). Over one-third of the portfolio is invested in this ETF. This is because the ETF covers about 8,000 stocks in nearly 50 countries. So, great diversification.
The second largest equity investment is in 1,000 units of Vanguard FTSE Canada All Cap Index ETF (VCN). This ETF is a market-capitalization weighted index representing the performance of Canadian large, mid and small cap stocks. The coverage of a mixture of variously-sized firms provides better diversification than an ETF made up of only the largest or smallest firms.
The third equity investment is in 100 units of iShares MSCI All Country World Minimum Volatility (ACWV). This also a source of international diversification, but based on stocks whose values are expected to fluctuate less than average.
Keeping only six ETF funds in the portfolio minimizes trading costs and simplifies portfolio monitoring. Yet, the Simple Six provides plenty of risk diversification, while expected to provide a reasonable return over the medium to long term.
The Simple Six Portfolio
I was asked by a friend to put together a simple portfolio. One parameter was that it should not be ‘too risky’, but that did not mean a ‘temporary’ drop of more than 10% below initial cost would be unacceptable. Also, the expected return had to be more than what was currently offered in a savings account at a bank, or what could be obtained by purchasing a GIC – not a difficult target to achieve.
The portfolio was not expected to be liquidated within 10 years, and of course, diversification of risk needed to be achieved. So I came up with the following suggestion, based on an assumed CAD 100,000 available to invest. I called it the Simple Six, because it consists of only six ETFs.
The Simple Six portfolio consists of:
300 units of Vanguard Canadian Aggregate Bond Index (VAB)
400 units of iShares Core High Quality Canadian Bond Index (XQB)
400 units of Vanguard Canadian Short-Term Bond Index (VSB)
1,000 units of Vanguard FTSE Canada All Cap Index ETF (VCN)
100 units of iShares MSCI All Country World Minimum Volatility (ACWV)
500 units of Vanguard Total World Stock ETF (VT)
I’ll explain my rationale in my next post.
Zika Virus and Inovio Pharmaceuticals
There have been some shocking pictures and videos of newborn infants suffering from microcephaly, apparently linked to their mothers having contracted the Zika virus. The World Health Organization claims that the Zika virus’ rapid spread represents an ‘explosive’ epidemic. So, today, the CEO of Inovio Pharmaceuticals, Dr. Joseph Kim, announces that it would not be impossible for a Zika vaccine to on the market this year. With that potentially positive news, shares of Inovio (INO on the NASDAQ) jumped from a closing price of USD 5.37 on Wednesday to around USD 7.00 by Friday’s after hours trading – a two-day increase of over 30%.
Some argue that Inovio seems to make these types of hopeful announcements whenever the threat of a major epidemic, like MERS or Ebola, threatens the world. The result is a short-term upward blip in the company’s stock price. Inovio is by no means the only firm that seeks to benefit from alarming media reports. According to Paul Santos, a self-described long/short equity, arbitrage, event-driven, research analyst, posting on Seeking Alpha, INO, is not the worst of the self-promotional biotechs.
While I personally, haven’t invested in INO, a member of my family has. I’m satisfied simply watching “Zika virus” trending on Google.
Has the Price of Oil Bottomed Out?
It appears that the portfolios I manage have begun a slow climb up from their recent lows. At least for the short term, the bottom for the portfolios occurred on January 20, 2016. Given the recent high correlation of the stock markets to the price of oil, relative to the longer term lower correlation, it seems that the market turnaround occurred when the price of oil retreated from its low of less than USD 28. Assuming the price of oil will slowly increase, I purchased some XLE ETFs yesterday for between USD 55 and USD 56. It’s only one day out, but so far I’m not disappointed with my decision. Let’s see what happens.