I know it's been over a month since I posted. But I've been doing two things in my free time this last month that have kept me from posting.
First of all, I've been focussing on Weight Watchers, working toward my goal of shedding 30 pounds. I am down over 26 lbs now in 13 weeks. For anyone that has tried losing weight in the past and been unsuccessful, I would highly recommend Weight Watchers.
As for my other pet project, I've been researching some stocks to start an investment with a small amount of fun money. I've also been deciding what to do with our family's investments as we have to transfer them out of an institution in Ontario. After all the research and interviewing numerous financial advisors, we've decided to go it alone and will be using a low-cost index fund strategy through TD EasyWeb. I started thinking after all the reading I've been doing, that a lot of people are losing a lot of money for lack of knowledge. So I thought I would share with you some of the things I've learned along the way.
Most people if asked right now why their portfolio has done so poorly would say it's the recession. But using GlobeInvestorGold to construct a pretend portfolio of low-cost index funds, I found that had I been investing $900 a month starting on Dec 31, 2003, I would be sitting at just below 0% growth. This is much better than a comparable actively managed portfolio which would have me sitting at -20-30%. Why the discrepancy?
If you don't already know, actively managed mutual funds are the mutual funds most of us hold. They are run by money managers who decide what to buy and sell within the fund. Problem is, you pay anywhere from 1-3% of your investment just to keep the fund running, so right from the get go you're behind. Plus, historically, actively managed funds have been notoriously poor at matching or beating the performance of the broad stock market. So when index funds came along the question became: if my fund manager can't beat the index, why don't I just invest in the index? And now you can. For example, if you buy the TD Canadian Index e-series fund online through TD Easy Web or TD Waterhouse, you will pay less than 0.5% for the management of the fund. Because all the fund aims to do is exactly track the Canadian Index, usually meaning the group of companies that are traded on the Toronto Stock Exchange. So if a company is sold on the index, so does the fund, and if one is bought, so does the fund. So no, you'll never be the guy at the barbecue that can boast about his index-beating fund, but you'll also likely never be the one whining about how badly your fund did. You'll always be just average.
How poorly do actively managed funds perform? Over at Div-Net they've got a great table showing what percentage of actively managed funds have been trounced by the index. It's not pretty. On average, 65-70% of actively managed funds were outperformed by the benchmark by which they measure their performance. The numbers are roughly 50-60% for Canadian funds, based on what I've seen in other sources.
Now you might ask, "But if I can pick the 40% of funds that do outperform the index, I'll be laughing. The problem is, there's almost no way of knowing. I'm currently reading one of the most seminal texts ever written on investing, The Intelligent Investor by Benjamin Graham (mentor and teacher of Warren Buffett, currently richest man in the world). In it he describes the problems inherent in picking winning mutual funds. First place most people would look is past performance. The problem is that most good performers have a nasty habit of becoming tomorrow's poor performers often because they were good performers because they were overweighted in the "industry of the minute". So for example in the late 1990s, many technology heavy funds were posting 100+% gains because of growth in the Internet sector. When it all came crashing down, so did their returns. Had you looked at these funds at the tail end of the success, you would have been crushed. Conversely, funds that were at the time underperforming because the manager refused to get caught up in the Internet craze of the time ended up performing very well when the tech sector crashed.
But the bottom line is, picking a winning fund is like playing roulette. The odds are stacked in favor of the house. If a fund is exactly tracking the index, but charging 2.5% to manage the fund, how do you think it performs in relation to the index? That's right, almost exactly 2.5% below the index. In fact, the number one factor determining fund performance over time is cost of operating the fund. Higher fees are in no way offset or justified by superior performance. In fact, quite the opposite is true.
So why isn't everyone invested in index funds, as my astute wife would ask? Well, the financial services industry is heavily invested in selling you actively managed funds. What would all those money managers do? Where would the companies get their commissions, trailer fees, and sales charges from without active funds? Even a TD advisor I interviewed who I ended up not going with tried to feed my the bulls&%t line that active funds are justified in their cost because they produce better performance. Nice idea but the evidence doesn't bear it out. But good luck to you if you can find an advisor willing to deal with you if you want to invest in index funds. This advisor flat out told me she would not allow me to purchase index funds through her, of course justifying the answer by saying that she was only saying this because it was in the best interest of my portfolio performance. A bunch of crap indeed.
So, if you want to invest in index funds, you'll be going it alone. You can invest in them through TD EasyWeb or Waterhouse, although I'd recommend EasyWeb unless you have $25000 in each account or more, because Waterhouse pins you with $100 annual account fees. You can also invest in index funds from other companies through one of the many online discount brokerages like QTrade or Etrade. But as for advice, either learn it yourself, or find a fee-only advisor who will give you advice outside of your investment account. That's the way I'm going now.
To all of you out there who are currently poo-pooing the whole notion of investing and wanting to stuff your money in a mattress for the next 30 years, consider the following. Right now, stocks are at historically low levels. If Wal-Mart put your favorite coffee on sale tomorrow would you run out and buy it or panic and sold the remaining cartons you had at home? As welll, each generation of investors suffers recessive amnesia when a market crash occurs, assuming this is the worst and it will remain down forever. But periods of low market activity have the wonderful habit of being followed by higher than normal activity. Three points I urge you to consider.
1. Using the Stingy Investor Asset Mixer I tracked the performance of the portfolio I've chosen since 1973 to present (35 years, conveniently the time from now to my retirement!). I would have experienced a respectable 10% annual gain. That is more than I used in my retirement projections.
2. Looking at the past 183 years of US stock market data, Ed Rempel, a certified financial planner, has shown the following:
-2008 was an exceptional year in stock market history; only 1937 and 1931 have experience larger losses
-most large loss years are followed by large gain years
-70% of the entire history of the US stock market has been in positive years; in fact, 46% of the years studied have experienced gains of 10% or greater
-large gains are much more common than small ones: 25 years gained over 30% but only 3 lost over 30%
3. We are and we are not at a very unique time in financial history. Preet over at WhereDoesAllMyMoneyGo.com has a great link to a series of Time Magazine covers over the last 30 years with relation to stock markets. It is enlightening to see how similar things have been at many points in the past and how well they rebounded.
So is now the time to run and hide? No, now is the time to invest!