Tag Archives: mutual funds

My journey to Passive Index Investing, Part 2

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By Dr. Networth

Special to the Financial Independence Hub

After reading My Journey to Passive Index Investing – Part 1, you may think that I have it in for financial advisors.  I don’t.   I believe the majority of financial advisors truly want to help their clients, but either their hands are tied or they have misguided beliefs.

The way financial advice compensation is structured creates a situation which, unfortunately, benefits the financial industry more than the individual investor.   There are also some financial advisors who truly believe active management beats out passive index investing over the long-term, despite high commissions/MERs and strong evidence which says otherwise.  Stay away from these financial advisors, since they have “drank the Kool-Aid.”

I believe a financial advisor with a CFP designation should have a fiduciary responsibility to create a comprehensive financial plan.  This includes insurance, estate planning, portfolio management (using low-cost ETFs/funds), as well as “holding your hand” during the inevitable market corrections.

Is advice worth 1 or 2% in fees?

How much is that worth?   This is a difficult question to answer. I don’t think it is worth the typical 1-2% in fees, which most banks and financial firms charge, especially if you have a large portfolio.  With the implementation of “Robo-advisors” and financial advisors that charge flat-fee or hourly-based (not tied to commissions on products), consumers are now beginning to have more choice for financial advice at a lower cost.

As you may recall, Part 1 ended with me as a newbie staff physician  in 2009 with little financial knowledge and an idea planted in my mind to “check out ETFs.”

It wasn’t until 2010 when I came across an article in the Globe and Mail, by Rob Carrick, where he rated the best personal finance blogs of 2010.  One of the blogs caught my eye: “Canadian Couch Potato,” written by Dan Bortolotti, which has been the best resource for index investing in Canada.

 

Through CCP, I came across another Canadian personal finance blogger by the name of Andrew Hallam, and his book “Millionaire Teacher.  The Nine Rules of Wealth You Should have Learned in School“, which was  originally published in 2011 (updated in 2017).

Hallam’s book is worth the price of admission,  since he has read a ton of personal finance/investing books, and has summarized succinctly in his book.  If you still have doubts whether passive investing beats active investing over the long-term those doubts will be put to rest after reading Chapter 3.   Physicians practice evidence-based medicine, because research backs it up.  The same concept should apply when it comes to investing. The enormous amount of evidence in favour of passive investing is, in my opinion, equivalent to a “Grade A” recommendation in evidence-based medicine. 

I have read my fair share of excellent finance books/blogs, but everything that you need to know about personal finances and index investing in Canada can be essentially found in these two resources.   If you read Hallam’s book and CCP’s blog (in particular his “Model Portfolios“), then you will:

  • Know more than the majority of financial advisors out there

  • Understand that the #1 determinant of your long-term investment returns is your asset allocation (% stocks: % bonds)

  • Understand that the #2 determinant of your long-term investment returns is to keep fees/MERs low by using low-cost index ETFs/funds, which will outperform the majority of actively-managed funds

  • Understand how to manage your own portfolio with low cost ETFs with minimal effort/time  

If you spend a bit of your time with these two resources, then you will eventually be able to save 1-2% MER each year by managing your own portfolio. 1-2% savings on a $1 million dollar portfolio will be $10,000-$20,000 per year, every year, for the rest of your life. That is a considerable amount of money which can be used on your family instead, such as taking 1 or 2 nice family vacation trips per year. For the equivalent amount, how many hours would you need to work at your job?

Once everything has been set up, you only require 30 minutes per month to manage this portfolio.  It really isn’t that difficult, as Loonie Doctor explains. However, taking that first step to managing your portfolio can be frightening and may fill you with self-doubt.   Comparable to a medical student learning a new procedure/skill – “See one, do one, teach one”.  These 2 resources will help you with the “See one” part.  At some point, you will need to take the plunge.   Follow that with sharing your knowledge with others, and you will become an “expert” in DIY passive index investing.

Analysis Paralysis

A point I would like to mention is the “law of diminishing returns” when it comes to learning about index investing.   After a certain point, any additional time spent learning about the nuances of index investing will probably not result in better returns, and may in fact, cause analysis paralysis: Continue Reading…

Large taxable foreign portfolio? Watch $100K and $250K thresholds for CRA’s T1135 form

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If you’re a Canadian investor with a large taxable foreign portfolio, you need to be aware of your cost base, since exceeding $100,000 of so-called Specified Foreign Property (SFP) has to be reported to the Canada Revenue Agency.

This is examined in my (monthly) High-Net Worth column for the Globe & Mail Report on Business which was published online on Friday and was in the physical paper Wednesday, Nov. 15. You may be able to retrieve it by clicking on the highlighted headline: Pay Close Attention to Your Foreign Assets to Avoid Tax Troubles. (Depending on how often you access the site, access may be restricted to subscribers. I’ve summarized the main points below.)

If you file your own taxes, you may have noticed an innocuous looking “box” you may or may not tick each year that ask whether you own “Specified Foreign Property.” If you have a cost base of more than $100,000 of SPF you have to tick that box and fill out a CRA form called the T1135. For most Canadian investors the relevant investments will probably consist primarily of individual US stocks, ADRs and/or foreign equity ETFs trading on US and other foreign stock exchanges.

There is also a higher threshold of $250,000 you also should be aware of because this entails even more detailed reporting and paperwork, and the article suggests you may wish to avoid reaching that higher threshold. The $100,000 and $200,000 thresholds are per individual, not household, and again, it’s based on cost base not current market value.

Failure to comply can entail serious penalties.

How to stay below the threshold and still have foreign content

If you would rather not deal with more CRA paperwork and capital gains hassles, I’d argue you should try to stay below the $100,000 threshold, in which case you don’t have to tick the box on your tax return. Continue Reading…

Are Investment Fees for suckers?

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By Chris Ambridge, Transcend

Special to the Financial Independence Hub

Providing a service costs money, but paying a fee deemed as an unnecessary amount has come under attack from consumers at all levels. Think banking fees, or the perception of “hidden fees” on phone bills to brokerage and investment fees. Consumers are demanding more value and in some cases winning the battle.

There is more scrutiny on fees than ever before. Studies have shown many investors either believe they do not pay anything or have no idea what they do pay (Hearts & Wallets: Wants & Pricing — What Investors Buy & Competitive Ratings — 2016).

But everyone understands nothing in life is free and clients have a right to know what they pay.

 The long-view of investment fees  

For centuries, if an ordinary person had any liquid wealth the best they could hope for was meagre interest on their cash. Then, as the concept of companies developed, the notion of profiting from an equity investment emerged and stock exchanges were established in seventeenth century Europe to trade equities.

In Canada, much of the early development was raised in the London market, with public shares of large companies such as the Hudson’s Bay Company. The Toronto Stock Exchange (TSX) was created in 1861, and 17 years later the TSX was the second official stock exchange in Canada.

Commission-based Investing

At this time, being a stockbroker was a comfortable, genteel and very lucrative profession. By providing investors with access to markets, brokers earned fixed commissions of about 2% or more per trade. This lasted until May 1975, when negotiated commissions were introduced, leading to increased competition and a decrease in direct share ownership. Currently only 17% of the Canadian financial wallet is invested directly in stocks, down from 30% in 1990 when it was second in importance only to short-term deposits.

 Asset managers on the rise

 For less well-heeled investors, the first modern mutual fund was created in Canada in 1932. They were slow to catch on and grew very little between 1930 and 1970. However this was reversed in the 1970s when investors wanted greater stability following the oil crisis. Continue Reading…

Alternative Investments for the Masses

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Is it time for the average investor to look into alternative investments to the traditional balanced portfolio of stocks and bonds?

In a column in Thursday’s Globe & Mail Report on Business, I look at a relatively new mutual fund from Mackenzie Investments that gives both average and affluent investors a way to diversify their portfolios into alternative investments or asset classes.

You can find it by clicking on the highlighted headline: Alternative Investing for the Masses.

The Mackenzie Diversified Alternative Fund (“MDAF”) is positioned as a low-risk way to diversify beyond the typical “balanced” fund or balanced portfolio of stocks and bonds. As the article says, both traditional stocks and bonds appear pricey at this juncture, and studies show that putting up to 20% of a total portfolio can smooth returns. Indeed, many giant pension funds have far more than that, including such well known pensions as Ontario Teachers and OMERs.

Non-traditional asset classes seen as “alternatives” include private equity, infrastructure, emerging-market debt, limited partnerships and a host of other investments not easily accessed by the average investor. Pension funds can get their own direct access to alternatives but for individuals many were available only through “offering memorandums” available only to those considered sophisticated investors: with $1 million in investible assets or combined annual family income of $300,000.

Low entry point, liquid

By contrast, the Mackenzie fund can be purchased for as little as $500, like most mutual funds, and unlike many hedge funds, can be liquidated on demand like any other mutual fund.

The article goes into the fee issue: the A series has an Management Expense Ratio (MER) of 2.42% and the F series 1.25% (advisors will then tack on their own fee, typically another 1%). But affluent investors get a price break under the Mackenzie Private Wealth Solutions’ preferred-pricing program, with the basic management fee for household wealth in all Mackenzie funds tapering down from 0.8% to as little as 0.5% for $5 million dollar portfolios.

 

Choosing ETFs: the best ones are diversified and have low MERs

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If you want to include the best ETF investments in your portfolio, then it’s important to consider a variety of components. That’s because all Exchange-Traded Funds aren’t created equal

ETFs are one of the most popular and most benign investing innovations of our time: and the best ETF investments can be great low-fee ways to hold shares in multiple companies with a single investment.

The best ETFs practice “passive” fund management

The best ETFs practice “passive” fund management, in contrast to the “active” management that conventional mutual funds or some new ETFs 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 investments down.

We think you should stick with “traditional” ETFs.

The best ETF investments have lower MERs

The MERs (Management Expense Ratios) are generally much lower on ETFs than on conventional mutual funds. Continue Reading…