wall street 1987

so i was watching last night. its an almost 20 year old movie with charlie sheen and michael douglas on brokering, insider trading and corporate raiding. i really enjoyed it. ive been really digesting information about corporations and investment banking. ive rewatched the corporation, gotten a globe and mail subscription (its a toronto newspaper affiliated with the wall street journal) for its report on business section, gotten really interested in structured finance and structured products.

im wondering why magna entertainment built that horse racing complex in austria for 100 millions USD. sounds like scheme of some king. something like the corporate tax shelters kpmg was marketing aggressively to companies a while back.

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financial advisors

everyone should have a financial advisor, someone who counsels on financial matters, asses the needs and comes up with solutions. it is best to centralize all mutual funds, segregated funds, insurances, RRSPs, investments with the same advisor. however, not all advisors are equal. since all advisors, except some financial planners and some higher-end investment specialist, work on commission, it is important to know if your advisor is biased towards a certain product or a certain company.

for example, captive agents from companies such as industrial alliance, manulife, sun life, clarica, ing and the banks have incentives to sell products from the companies that employ them. their bonuses and commissions are higher for thos products. they can offer others, but generally wont, since they would be loosing money.

the best advisors are either accredited financial planners or independent financial security advisors. financial planners work partly on commission, and partly on pay. a financial planner can bill you for all his advice, whether you take it or dont, make you sign an exclusivity aggreement with him, so that you dont implement his planning advice with someone else.

some speciality brokers that manage solely investments for clients take off a trailer fee for themselves, an additional 1-3% every year as their pay. to work these brokers there always is a minimum investment, varying from 100000$ to 500000$.

independent financial security advisors are like unaccredited financial planners. they can not bill you for advice, nor can they make you sign an exclusivity aggreement. however, they are mostly unbiased. they have aggreements with a multitude of insurance and investment companies. most commission from these companies is standard, so there is no incentive to sell one product more than another. which is good for the client, since he gets the best of both worlds. independent unbiased advice, that wont cost money each time new advice is given.

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investment bankers – hedge fund managers

really interesting article on newyorkmetro about the investment bankers from goldman and sachs and how they carve up their 11 billion dollars in bonuses at the end of last year.

another one on how the richest people in finance are hedge fund managers and how they get there.

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active vs passive managed

there always will be a debate whether an active managed fund is better than a passive or non managed fund. a non managed fund, like barclays iUnits exchange traded funds, are funds in which the stocks and titles which constitute it are not sold on under performance. etf's follow the indices of the stock market. an active managed fund, like jarislowsky's funds generally perform above the indicies and actively sell and buy stocks and titles which are included in the fund.

in these questions, the main thing is to do better than the current inflation rate, which is at 3%. if the tsx index did 12 % last year, inlation was 3%, and the Management Expense Ratio was 0.45%, the net gain was 8.75%. if the fund is actively managed, MER are a lot more, between 2.4%-2.8%. the important thing is to do consistenly better than the index. and remember past gains are not a guarantee of future gains.

i think the important thing to remember is to always think about diversification in your portfolio. this way, you can always reap the benefits of both strategies.

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the smith manoeuvre

continuing on my financial musings, the smith manoeuvre is simply a financial manoeuvre to make your mortgage tax deductible in canada. this is not a problem in the US where you can already deduct the interest on a mortgage. in canada, this is not possible. a portion of the interest can be deducted if you work from home or are self employed. most of us end up paying our house or condo 2-3 times its actual worth. the way to do this is to use the equity built up in your home to invest in the markets, in your own business or in real estate. this loan toward an investment is tax deductible in canada. for any money you pay off on your mortgage, your reborrow this money for investment purposes and end up with what we call only good debt. good debt is debt on which the interest is tax deductible. bad debt is where the interest is not.

the smith manoeuvre is used to convert bad debt into good debt. for most families, the smith manoeuvre can substantially reduce the interest payments. and using an all in one product like manulife one, you can save even further. an all in one product combines a credit line, a mortgage, a savings account, a chequing account and a credit. the main philosophy is to save as much as possible the daily compound interest that you pay on your mortgage.

though i would not suggest to invest the whole equity directly in the stock market, i do think that as long as the interest gained on the equity is higher than the interest on the loan (minus the deductible interest since this interest is deductible and you will get a refound from the CRA in proportion to your marginal tax rate) you are in good shape.

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capital protected structured notes

its been a few years since structured financial products have been on the rise. structured notes protect the capital that is invested for a number of years, caps the maximum interest each year. a good alternative to bonds, since canadian bonds have not been doing so well due to higher interest rates. structures notes enable the investor to expose his portfolio to the stockmarket without too much risk. for example, one captial protected structured note from citigroup follows 8 different stock market indicies all over the world. it has compound interest capped out at 10% each year, a 2% MER at the purchase of the note, no other MER later on, and a vibrant secondary market where notes are sold 6 months to a year after purchase at 103% to 127% over stock price.

one of the negative aspects is that if the markets are negative, the interest will be negative, so clients will have to wait until the note matures before cashing in only the guaranteed capital. still, not a lot of investments guarantee capital, so this might be a nice alternative to stocks and bonds.

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