By David Trahair
Special to the Financial Independence Hub
I have been writing about personal financial issues for over 12 years now. I have also been giving seminars to other accountants on my ideas since 2008.
Suffice it to say I have spent a large amount of time thinking about and analyzing the best way to get ahead financially and I have had a tremendous amount of feedback along the way.
And I still have 100% of my family’s investments in guaranteed fixed-income products.
Zero exposure to stock market
That’s correct, I have zero exposure to the stock market. It’s all in Guaranteed Investment Certificates (GICs) or provincial government bonds using a three-year laddered approach.
Sound crazy? Well I’ll tell you why it’s not.
First of all, the assumption is that you have to have exposure to the stock market because it’s the only thing that will give you excellent returns. But how good are those returns versus plain old GICs?
I have done an analysis for my Enough Bull course that will give you some idea.
I compared the average annual return of the stock market as measured by the S&P TSX Composite Total Return Index (the one that includes reinvested dividends) to the average annual return of five-year GICs for the last fifty years to April 30, 2015. The stock market did very well over that period – an average annual rate of return of 9.16%.
How well did plain old GICs do over the same period? They averaged an annual return of 7.21%.
So the stock market beat GICs by 1.95% per year on average.
That means that if you had put all your money in the stock market using an actively managed equity mutual fund with an MER of 2%, you were in GIC territory after fees.
I don’t know about you, but that isn’t a large enough return premium for me to trust the stock market, even though it is possible to reduce fees significantly with low-cost Exchange Traded Funds (ETFs).
But the other important issue is that the vast majority of Canadians have not switched to ETFs and continue to pay high fees to their advisors that sell them mutual funds. And many of those funds do not do as well as their benchmark index.
The S&P Dow Jones Indices versus Active Funds (SPIVA) Canada Scorecard for 2012 reported that the majority of Canadian active managers saw their returns lag the index, as only 41.18% of Canadian equity funds outperformed the S&P TSX Composite Total Return Index.
If you expand the timeline to the three years ended December 31, 2012, only 15.39% of active funds exceeded the index return. For the five years ended that same day, the results were even worse – only 10.35% of actively managed funds in the Canadian Equity Funds category outperformed the index.
And that is the sad reality. Many people assume their equity investments are doing very well and blowing away any return they could get in safe GICs. For many the reality may be quite different.
Mandated personal rates of returns may change attitudes
What people really need is their personal rate of return on their portfolio, after any fees. Only then will they be in a position to compare to the safe returns offered by GICs.
The good news is that this will be evident soon. As of July 15, 2016 investment firms will be required to disclose not only the personal rate of return on client portfolios, but also the total fees charged on the account including any hidden fees like trailing commissions.
It’ll be interesting to see how many people begin to consider my favourite investment when they discover how much they are paying for poor investment returns.
David Trahair, CPA, CA, is a national bestselling author and speaker who gives customized personal finance courses to organization including CPAs. His website is www.trahair.com. Wiley recently published a new second edition of his book, Enough Bull.