Tag Archives: indexing

Why Robb Engen’s 4-minute RRSP portfolio is tough to beat

Posted By Robb Engen | March 7, 2017

I spent a total of four minutes working on my RRSP portfolio last year.

It wasn’t benign neglect: my two-ETF all-equity portfolio really is that simple! I made four trades, which took about a minute each after determining how much money to invest, in which of the two ETFs to allocate the investment, and how many shares that would buy (plus a few seconds to enter my trading password).

The buying process is easy since I don’t have any bonds in my portfolio. I simply add money to the fund that brings my portfolio closest to its original allocation – 25 per cent VCN and 75 per cent VXC.

I don’t expect my four-minute portfolio to change much this year. I still plan on making four trades this year in my RRSP, and now that I’m contributing regularly to my TFSA again I’ll make an additional four trades in that account. Add 12 monthly contributions to my RESP and that brings my total time spent on investing to just 20 minutes a year.

Sorry but this is one broken record worth listening to …

Posted By Graham Bodel | November 23, 2016

Last month S&P Global published its 2016 mid-year SPIVA Canada Scorecard, which compares the performance of actively managed Canadian-based mutual funds with their benchmarks.

The conclusion is clear: actively managed funds, after fees, underperform their benchmarks over time. Investors may be better served using passively managed alternatives such as index tracking mutual funds and exchange traded funds (ETFs).

This evidence is so consistent and presented so often it almost sounds like a broken record, but given how many Canadians still pay high mutual fund fees for under-performing funds, we believe it’s a broken record still worth listening to.

Before we dive into the data, it’s worth noting a few important methodological points highlighted by S&P:

The study compares the performance of each fund to that of a benchmark selected to provide a sensible “apples to apples” comparison.
The survey looks at both “asset-weighted” and “equal-weighted” average fund performance and the conclusions drawn are similar.
The study accounts for “survivorship bias”, that is it includes funds that were closed or merged with other funds over the relevant time period.

Many funds don’t even survive, let alone outperform

This last point is really important. According to the study, only 58% of Canadian Equity funds actually survived the last 5 years. One can only assume that those funds that didn’t survive were not stellar performers. US and International Equity funds fared a little better with 70% of US funds and 84% of International funds surviving the full 5 years.

So how many funds survived and outperformed their benchmark? In the Canadian Equity category, only 29% of actively managed funds outperformed their benchmark over the last 5 years. Those aren’t very good odds considering that it’s nearly impossible to predict in advance which funds are likely to outperform.

Diversifying outside Canada important, but performance of active US and International Equity funds is worse

The Canadian stock market is fairly concentrated in certain industries and specific large cap stocks so it’s important for Canadian investors to diversify outside of Canada. Unfortunately those looking to diversify using active US and International Equity funds won’t be happy with the SPIVA results. Only 14% of International Equity funds outperformed their benchmark and 0% (yes, none!) of US Equity funds outperformed their benchmark over the 5-year period.

So maybe you’re feeling lucky and think your Canadian Equity manager has some sort of advantage and will be one of the lucky out-performers. Once you look to diversify outside of Canada (and you should) the odds drop dramatically (and infinitely in the case of US Equity managers!)

The study only takes us to half-way through 2016. We wonder how active fund managers have fared through the latter half of the year with such tumultuous events as the US election. Given that most market pundits not only didn’t predict the outcome of the election correctly but missed how the market would react in response leads us to believe that when the next SPIVA scorecard is published, the same old broken record will still be spinning.

The data speaks for itself but we’ll conclude by saying that when you invest in “the market” by holding passive investment funds or ETFs, you get the market return with a fair degree of certainty. You will not experience the additional uncertainty of whether your chosen active fund will outperform or underperform the market.

Peer reviewed academic data shows that over longer periods of time very few active funds are able to outperform the market and those funds that do are nearly impossible to identify in advance. The fees for passive investment funds and ETFs are much lower than those for active funds. Again, active fund management comes with lower average investment returns after fees and less certainty of performance versus the market.

Graham Bodel is the founder and director of a new fee-only financial planning and portfolio management firm based in Vancouver, BC., Chalten Fee-Only Advisors Ltd. This blog is republished with permission: the original ran last Friday (November 18th) here.

Robb Engen’s 4 biggest Investing Mistakes

Posted By Robb Engen | October 14, 2016

Learn from your mistakes - motivational words on a slate blackboard against red barn wood

I was 19 years old when I first started investing. I diligently set aside money every paycheque, starting with $50 every two weeks and eventually increasing that to $200 per month, to save for retirement inside my RRSP. Sounds like I was off to a great start, right? Wrong!

Even though my intentions were in the right place, my first attempt at investing was a complete disaster. Here’s why: I didn’t have a plan

It’s good practice to save a portion of your income for the future, even at a young age. The problem for me was that I was still in school and didn’t have a plan – I had no clue what I was saving for.

I had read The Wealthy Barber and The Millionaire Next Door and so I knew the earlier I started putting away money for retirement, the longer I’d have compound interest working on my side, and the bigger my nest egg would be.

Unfortunately, I was saving for retirement at the expense of any other short-term goals, like paying off my student loans, buying a used car, or saving for a down payment on a house.

I didn’t have any short-term savings

Speaking of RRSPs, what was a 19-year-old kid doing opening up an RRSP when he’s only making $15,000 per year?

There were no real tax advantages for me to save within an RRSP when I was in such a low tax bracket. I’m sure I blew my tax refunds anyway, so what was the point?

Granted, the tax free savings account hadn’t been introduced yet, but I would have been better off using a high interest savings account for my savings rather than putting money in my RRSP.

I didn’t have a clue about fees and tracking performance

Like a typical young investor I used mutual funds to build my investment portfolio. I was encouraged by a bank advisor to select global equity mutual funds because, as I was told, they would deliver the highest returns over the long term.

What the bank advisor didn’t tell me was that the management expense ratio (MER) on some of those mutual funds can be 2.5 per cent or more, and high fees will have a negative impact on your investment returns over the long run.

Bank advisors also don’t tell you which benchmark these funds are supposed to track (and attempt to beat) so when you get your statements in the mail it’s impossible to determine how well your investments are doing compared to the rest of the market.

I drained my RRSP early

I didn’t have a good handle on my finances in my 20s and often resorted to using credit cards to get by. Without a proper budget in place, and no short-term savings to fall back on in case of emergency, I had no choice but to raid my RRSPs to pay off my credit-card debt and get my finances back on track.

Taking money out of my RRSP early meant paying taxes up front. Withdrawals up to $5,000 are subject to 10 per cent withholding tax, while taking between $5,000 and $15,000 will cost you 20 per cent, and withdrawals over $15,000 will cost you 30 per cent.

Your financial institution withholds tax on the money you take out and pays it directly to the government. So when I took out $10,000 from my RRSP, the bank withheld $2,000 and I was left with $8,000. In addition to the withholding tax, I also had to report the full $10,000 withdrawal as taxable income that year.

While I can’t argue with my reasons for selling, my dumb decisions beforehand cost me a lot of money and left me starting over from scratch.

Final thoughts

We all make investing mistakes – some bigger than others. If I had to do things over again today I would have done the following:

Create a budget – A budget is the foundation for responsible money management. Had I used a budget and tracked my expenses properly from an early age I would have lived within my means and kept my spending under control.
Open a tax free savings account – Yes, the TFSA wasn’t around back then but for today’s youth it makes much more sense to save inside your TFSA instead of your RRSP like I did. You can put up to $5,500 per year inside your TFSA and withdraw the money tax free. You contribute with after-tax dollars, so you won’t get a tax refund, but you’ll likely be in a low tax bracket anyway, so contributing to an RRSP won’t give you much of a refund either.
Make a financial plan – We all have financial goals and even at a young age I should have identified some short-and-long term priorities to save toward. I’d take a three-pronged approach where I’d use a high interest savings account to fund my short term goals, my TFSA to fund mid-to-long term goals, and eventually open an RRSP to save for retirement. No doubt I’d be much further ahead today if I took this approach earlier in life.
Use index funds or ETFs – Now that I understand how destructive fees can be to your portfolio, I’d look into building up my investments using low cost index funds or ETFs. The advantage to using index funds is that you can make regular contributions at no cost while achieving the same returns as the market, minus a small management. Some brokers also offer free commissions when you purchase ETFs.

Did you make similar mistakes when you first started investing? How did you overcome them?

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on August 7th and is republished here with his permission.

When to buy an ETF for maximum return

Posted By Pat McKeough | September 6, 2016

To determine when to buy an ETF, some investors use technical analysis and other tools. But you need to dig deeper.

Investors often wonder: what is a good entry point when purchasing a stock or an ETF?

The first question before asking when to buy an ETF is whether an exchange traded fund investment is right for your portfolio. An ETF investment is one of the most popular and most benign investing innovations of our time. ETF investments are a little like conventional mutual funds, but with two key differences.

First, ETF investments trade on a stock exchange throughout the day, much like ordinary stocks. So you can buy them through a broker whenever the stock market is open, and generally you pay the same commission rate that you pay to buy stocks. In contrast, you can only buy most conventional mutual funds at the end of the day. What’s more, commissions vary widely, depending on negotiations with your broker or fund dealer.

Second, the MER (Management Expense Ratio) is generally much lower on ETFs than on conventional mutual funds. That’s because most ETFs take a much simpler approach to investing. Instead of actively managing clients’ investments, ETF providers invest so as to mirror the holdings and performance of a particular stock-market index.

ETFs practice this “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Traditional ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poors). Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks change. They don’t attempt to pick and choose which stocks they think have the best prospects.

This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.

When to buy an ETF

Vanguard unveils four single-factor actively managed ETFs

Posted By Financial Independence Hub | June 22, 2016

Vanguard Investments Canada Inc. has launched four new actively managed ETFs that began trading on the TSX on June 22. In a press release, the company said they are the first actively managed Exchange Traded Funds it provides in Canada.

In the U.S., and despite its strong image as a provider of low-cost “passive” index-tracking strategies, The Vanguard Group Inc. has had a long track record with actively managed strategies and, with almost US$1 trillion in global actively managed assets, is one of the world’s largest active managers.

The new “active” products are managed by Vanguard’s Quantitative Equity Group (QEG), which has existed since 1991. Each of the new ETFs will have a management fee of 0.35%. (Final MER may be slightly higher after fees and expenses).

The four new ETFs are:

Vanguard Global Minimum Volatility ETF, ticker VVO.

Vanguard Global Value Factor ETF, ticker VVL.

Vanguard Global Momentum Factor ETF, ticker VMO.

Vanguard Global Liquidity Factor ETF, ticker VLQ.

For more on the development, see this link on the company’s website.