With stock markets falling again on Wednesday, there’s no doubt, panic and confusion are starting to set in. Buy the dip? Cash out because this is turning into a meltdown?
Oh, and your line of credit and mortgage are going to cost you an extra $500/mo after the Bank of Canada increased interest rates?
On Monday, March 2nd, I hosted a conference call to try and provide people with a bit of insight on whats going on in the financial markets. and how to think about your investments if you’re:
1. With an Investment Manager
2. With a Robo-advisor
3. A DIY’er
4. Sitting on cash
The recording is below. Feel free to send me any and all questions you may have!
Better than bonds is my previous post in which I offer a reasonable alternative to just buying straight bonds and GIC’s to cover your retirement income.
But if that’s too risky for your desires, I’ve come up with something that’s even more stable and very boring.
A portfolio entirely of bonds and GIC’s is about as boring as you can get, but that’s too boring. So to shake things up just a bit, I’ve done some sprinkling.
A pinch of prefs for your taste buds…
Preferred shares (prefs) offer an attractive compliment to bonds, especially as a hedge against rising interest rates. In recent years, the rate reset feature of prefs has burned a lot of investors who didn’t know, or understand what they were getting into but it’s that same feature that will provide some protection for a portfolio of bonds.
There’s no need to reach for yield with prefs and included in the model portfolio are prefs issued by highly rated companies. As for the bonds, again, nothing exotic and the laddered list of maturities includes the same publicly listed names which are the go-to’s for Canadian pensions an annuities.
So while not an actual annuity, I’d argue the stability of this portfolio is definitely annuity’ish.
Or annuity-like.
Lower for longer is where we’re at when it comes to the world of interest rates we live in.
Gone are the days you could buy some government bonds or GIC’s when you retire and let the guaranteed income stream roll in.
Today, the 10 year Government of Canada bond pays a whopping 1.33%. Said another way, if you were looking for secure income and wanted to lend the Canadian government a million bucks, you’d get a whopping $13,000 in interest payments each year and then your million back in 10 years. On this date in 1990, that same million would earn you a respectable $97,500 each year and back in January 1980, you were paid about $110,000 (11% per year).
Options?
Accepting the interest rate from bonds as-is, may make sense for some people. If you’re the type of investor that’s deep in retirement and has zero interest or trust in the capital markets, zero willingness to take on any portfolio risk and zero need for income from your portfolio, then yeah, a portfolio yielding 1’ish percent may be right up your alley.
For everyone else, taking on slightly more risk to generate more income works, if you understand the trade off.
So what might a more aggressive but still reasonably conservative portfolio look like? Here’s an example of a portfolio that’s still pretty conservative but first….
…..the usual disclaimer about the following info and company names not being recommendations and consulting with your investment person before you make decisions, which, by the way, if you need an independent and unbiased investment person, I. KNOW. A. GUY…...
The following portfolio is:
20% GIC’s
18% Bonds
20% Preferred Shares
42% Equities
And looks a little something like:
Ok so a few points, firstly, not all equities are created equal. With clients I speak to, it’s super common to lump equities into one giant homogenous basket, which really isn’t accurate. The utility company that operates the majority of Ontario’s electric transmission grid is a “stock” just as much as the more volatile commodity or tech companies you may know of, but has a way different business risk profile. You’ll see a handful of utility companies in the list, which are there because of their super stable, predictable (and often monopoly) businesses.
Also in the list, are some mega-large cap companies (Apple, Microsoft), which pay a dividend that is expected to grow on a yearly basis and offsets the flat interest payments generated by the bond part of the portfolio. While we’re on the topic of bonds, the highly rated bonds along with the GIC’s offset the very modest position in high-yield bonds.
Finally, sprinkling in some preferred shares of the minimum rate-reset type, makes sense in this example. The minimum rate-reset feature means that if interest rates plummet at the time the dividend is scheduled to reset, those securities maintain a minimum dividend payment and protect the value of the preferred share compared to ones that don’t have the feature.
Better than bonds?
If the comparison is lending money at 1.33% over 10 years, then the answer is definitively, yes.
Questions about investments? I’ve been asked a lot of really good ones lately so compiling a few seemed to make sense. Amazingly, I was able to answer most questions without directly saying “it depends”, because most times in personal finance, it really does.
First up:
Q: Our friends suggested buying dividend-paying stocks as a retirement income strategy. It has worked for them. Is it a good strategy?
A: Yes, BUT, it shouldn’t be your entire investment strategy. Blindly buying dividend stocks worked over the past decade, primarily because dividend paying stocks like banks, utilities, telco’s or Real-estate Investment Trusts (REITs), have increased in value as people have assigned a greater value to them. As the overall interest rate environment has declined, stocks which pay dividends become more valuable relative to the other investment alternatives out there. But if rates increase over a sustained period of time then that outperformance reverses, so it’s important to have a diversified investment strategy which yes, includes dividend paying companies, but also includes sectors or assets that perform well rates rise, like consumer discretionary stocks or rate-reset preferred shares. As a side note, the more popular ETF’s, index funds and even the crappiest mutual funds will probably have some dividend paying stocks in them.
Q: How can you tell if a fund is going to underperform or outperform a passive investment
A: I can’t and no one can. Over long periods of time, there’s generally an inverse relationship between the fees an investment manager collects and investment performance (the higher the fees, the weaker a fund’s performance tends to be) but it’s impossible to know in advance which funds will do well and which ones won’t. It’s equally impossible to know how they will perform relative to passive investment strategies, of which there are many.
Q: What is an asset-allocation
A: Asset-allocation describes the proportion of your investments which are held in stocks (ownership in a company) vs bonds (lending money to a company). Usually it is expressed as two numbers, with the first representing the percentage of your portfolio invested in equities and the second number representing the percent invested in bonds. For instance, a “60/40” portfolio has 60% of the portfolio in equities and 40% in bonds. An 80/20 portfolio would have 80% of the portfolio invested in equities and 20% in bonds. The two numbers always have to add up to 100 and while stocks offer the prospect of higher returns, they are also riskier, meaning their value can fluctuate a lot more than bonds.
Investments are talked about in a fairly homogenous way (“markets went up, markets tumbled”) but portfolios held by real people are rarely invested entirely in equities, which would be a 100/0 portfolio. Everyone has a different asset-allocation depending on their specific investment objectives, how much risk they’re willing to take on and their investment horizon (when will they need the money).
Q: Why would you recommended an investment manager that charges fees. Aren’t investment managers and mutual funds just throwing money away when you can invest passively.
A: It depends. On average, mutual fund fees in Canada are still too high. I regularly come across portfolios where the average MER is in the high 2% range and for which the person is getting no communication from their salesperson other than at RRSP time. That’s a waste of money. But there are a handful of companies in Canada which charge reasonable management fees and who really focus on letting people know what’s going on with their portfolios. They don’t claim to be able to outperform the market day in and day out, they just focus on investing your money actively and there’s value in that. Not everyone is cut out to be DIY investor. I can be brutal trying to manage the financial mediasphere and figuring out how that information relates to you. As much as I come across high fee mutual funds, I’m seeing more DIY portfolios which are a bit all over the place (to put it nicely).
Q: Is a recession coming?
A: I don’t know and no one knows for certain. The best way to deal with uncertainty and unpredictable markets is to have a well diversified portfolio.
(Which leads to the next question)
Q: So why is everyone predicting a recession is going to happen?
A: The US-led trade war with China, slowing corporate earnings growth and signals from the bond market (inverted yields and negative yields) are all indications of slowing or declining economic activity.
The trade war is legit and I think the week to week “deal or no deal” headlines divert attention from a longer-term economic war that is probably one of the few things that has some bi-partisan support in the U.S. The trade war is something that could persist well beyond the current administration and I don’t think investors are thinking about that.
Q: I thought Investment people knew how to get outsized returns? I regularly hear my friends say they get returns of 25% in their portfolio with almost no risk and “good” investment advisors should be able to earn more than that.
A: They’re mistaken.
Drumming up an Investment Policy Statement (IPS) is the only way I can figure out what to do with a client and portfolio. At the moment, that client is me.
Transitioning from an established salaried income to basically starting from scratch with freelancing and project work has meant a fairly simple investment strategy.
sell everything.
The immediate need to bridge the gap between income and short-term expenses, aka consumption smoothing meant the whole point of my savings changed.
Out: Investing for the long term
In: Pay my mortgage, food and party expenses
But one day, I’ll actually earn enough to cover my monthly bills and here’s where the IPS provides much needed hand holding.
Ok, so what exactly is it?
Think of the IPS as the link, or communication between a financial plan or objective and the investment(s) required to achieve that plan. It’s a road map.
Also, it’s a bouncer. It blocks casual or otherwise shitty investment advice from steering you off course.
Here’s how a basic IPS is generally laid out:
What’s your objective
Return Requirements
Risk Tolerance
What rate of investment return do you need to do whatever it is you’re looking to do now (perhaps you’re IN retirement) or in the future. Just answering that part might save you the headache of finding and monitoring investments in the first place, for example, what if your return requirements could be met with, GIC’s?
The second part, risk tolerance, often gets overlooked and even if your bank brokerage pretends to answer this part, they’ll have you down for “medium or medium-high”, which gives them legal cover to invest your money into all the goods they’re selling.
Hot tip: you can’t have a high return requirement paired with a low tolerance for risk. It just doesn’t work that way.
What constraints are we working with?
Time Horizon
Taxes
Liquidity needs
Legal/Regulatory
Unique considerations
What the what is time horizon? Think of it as how long until you need your money or how long you can invest your money. This is the #1 constraint, by far. As your time horizon gets shorter, the amount of money you should invest in stocks and bonds goes down. If your time horizon is under two years (i.e. if you need your money for a downpayment on a house) then NONE of your money should be invested.
Hot tip: Resist the urge to invest your way to a short-term goal. I cringe when I hear (usually younger) people saying they’ll have more money for a car or a house if they invest it asap. That might be true, or that strategy might ruin your plans. Your call.
Taxes! (Zzzzzzzzzzzzz). I’ll try to make this constraint more exciting by providing advice from NBA great, Tim Duncan,
“Don’t park municipal bonds in your Roth IRA, because they’re typically, already tax exempt.”
If we had tax exempt investments in Canada (we don’t) this would be the equivalent of placing those tax exempt investments into a tax exempt account like a Tax Free Savings Account (TFSA). What we do have in Canada are differing tax treatments of investment returns (capital gains, dividends, interest) and different types of investment accounts (Registered, TFSA, non-registered)
Hot tip: Individual portfolios still need to be properly structured. Taken to the extreme, there’s a tendency to think of placing all you capital gains (equities) in non-registered accounts and all of your fixed income (bonds) in tax exempt or deferred accounts. You could do that, but then you can’t rebalance over time.
Next up, liquidity needs. These can cash that’s immediately needed (roof is 20 years old and overdue to be replaced), specific dates in the future (child attending university) or on-going (meeting travel expenses during retirement). Making sure these are known in advance is helpful to make sure you have the cash set aside at that time or know what investment(s) you would be selling.
Legal and regulatory factors - Divorce settlements and the movement of cash are first to mind in terms of legal constraints but another example is a person who holds material inside information regarding a publicly traded company. That position should be communicated in an IPS and trading in that name would be limited to certain times and illegal in certain circumstances. Individuals will encounter regulatory requirements if they have a registered retirement income fund (RRIF) which is subject to yearly withdrawal requirements depending on age.
Unique - Frequently, a preference for companies that meet certain environmental, social or governance (ESG) may be communicated here in accordance with a Socially Responsible Investing (SRI) mandate. Significant exposure to certain industries may have an impact on how your portfolio is invested. For example, I did a Portfolio Second Opinion for a person who works for a small, but fast growing artificial intelligence company, who received shares in the company as a bonus, and who owned the company and related ones, in their retirement and non-registered investment portfolio.
Hot tip: this is the person you invite to the casino.
Ok now that’s all laid out, where next? And what’s the strategy for getting there? Personally, I have yet to answer this question. Do I want to select the investments and strategy myself? Probably. But for those who don’t, the options for investing these days have never been better or cheaper. https://www.youandyoursfinancial.com/insights-and-advice/2018/5/16/never-been-better
But also, the options can be overwhelming.
Having a road map hopefully, if not certainly, helps.
Blame the baby.
When we realized I would have to get up to snot suck our daughter’s nose in the middle of the night, we were worried she’d take forever to get back to sleep. Turns out, I’m the one who can’t get back to bed, which means another middle of the night post.
NBA free agency and my undying love for Vernon, BC are a few of the topics rolling around in the last few hours, in addition to the following thoughts:
1. I’m totally over the “Toronto is expensive/unaffordable conversation”. The impatience has been lingering for a while but was prompted over the weekend at a family outing to Ribfest, in Etobicoke, which btw, Billy Bones BBQ had the best ribs, in case you were wondering. While debating the other contenders, Lisa and I ran into some former downtown work colleagues, who now live a five-minute walk from the event location, Centennial Park. They’re the same vintage as us (“older” millennials) and made the decision to trade away the prospect of seven-figure debt, for longer commute times. They’re happy, they have space for their family, and plenty of park space and recreation in the surrounding area.
And that’s it. Nothing fancy.
There are dozens of reasonably priced communities all over the GTA and the country, how did we get to this insane point, where we forgot about them and settled on obsessing over just two?
2. I have quite a few clients who invest with Robo-advisors, which is perhaps a bit confusing since they’re supposed to offer…. “advice”? It’s not a blanket dig at Robos, but I genuinely think there’s an interesting question, how will fin-tech companies and their scale-to-infinity mentality, integrate non-scaleable services like advice and planning, which all result in negative economies of scale.
3. Yes, you need to consider after-tax returns when making investment decisions, but too many investors and their advisors are doing something which I’ll describe as prioritizing tax-minimization. For example, it’s fairly common to see portfolios with preferred shares (dividend income benefitting from the dividend tax credit) replacing fixed income (interest income taxed at your marginal rate). These are usually very conservative clients and when I ask why that decision was made, the answer is that they were told preferred shares are “risk-free, like bonds but at a lower tax rate”, which is less than accurate ...
4. Hey, DIY Investors guess what? You’re all really, really scared of Trump! Biggest piece of advice I can offer is, fairly boring - turn off the news and properly set your asset allocation. Most portfolios have done well over the last number of years, but everyone seems to be paralyzed by those gains and what to do with their super high equity allocations.
5. Thinking about how curated social media platforms like Instagram have become, got me thinking how we don’t share anything about money either online or IRL. I wrote a post last year covering some of my past investing mis-steps, https://www.youandyoursfinancial.com/insights-and-advice/2018/6/6/stupid-things, but it certainly feels like honest financial conversations need to happen more often.
6. I get asked every now and again what I am personally invested in and unfortunately I have a boring answer. It’s all cash at the moment, for a number of reasons. The biggest, was to have it available during the startup portion of this business, but as that progressed, my wife and I haven’t sat down to revise it. So there you have it, at the moment, the person who does Investment Plans, is without and updated one! It’s in the works, but again, this is the baby’s fault.
Two years into starting my own practice, it still takes me an absurd amount of time to write a well thought out blog post (which is why I rarely) do it, but since I’m supposed to have at least some content on my website, I’m going to try the exact opposite of well thought-out.
How does 3am ramblings sound?
If my wife and I forget to put our sound machine on, 3am is the time we’ll wake up after someone with a tuned exhaust races down our street (unclear why they don’t take Dufferin instead), or more recently, it’s the time our newborn decides to feast, poop, or some loud combination of the two.
It’s about the time I’m unable to fall back asleep and will occasionally think about exciting things like, who has the best takeout sandwich in the Parkdale/Roncy/Brockton/Junction area, and the American love affair with Drake.
The mind also drifts back to the Investment Plans I do for clients, what they’re investing in and the conversations I have with them. After 2 years, my analyst training has me looking for trends, trying to eliminate outliers and just trying to come up with a picture that is not 100% right, but hopefully, a bit less wrong.
So, what ARE they investing in? Here are some not well thought-out observations which are probably going to sound like 3am ramblings. They are.
1.) There are still plenty of shitty mutual funds out there. Shitty shit shit. And It’s the usual suspects overcharging people without them knowing, but at least they’re pretending to actively manage their pot, bravo!
2.) In a weird twist, one of the alternatives showing up are overpriced portfolios of index funds. I think the sales pitch is “hey, we’re looking out for you, we can save you money on fees by investing in index funds”. Except that a passive portfolio for almost 0.70% isn’t that great either. I’ve also seen some “independent” advisors tack on a 1% fee on top of that, I guess as comp for their twice per year calls? Their pitch is the same - going from an actively managed fund at 2.4% to a passively managed portfolio for 1.7% is a win for YOU the consumer. **eye-roll emojii**
3.) I’m not thrilled with Robos. They fall into the above criticism of index funds, which many times, ends up being an expensive indexed portfolio. There are excellent Canadian investment managers out there who charge not much more, for true active management. Those are more attractive options, in my opinion, OR if you want to go true passive, Vanguard and Blackrock both offer diversified ETF options and at this rate, those investment products will be free if they keep up their price war.
4.) The Non-bank Discount brokerages got game. I was wrong in thinking I’d see DIY Investors go to their bank’s own online broker (like TD Waterhouse). Instead, clients seem to be ditching the bank altogether. Maybe the bank didn’t tell them there was an online broker option? In the meantime, it’s been over a decade since the E-trade baby told us that investing was simple, not to be outdone by Questrade’s anger-inducing campaign https://www.youtube.com/watch?v=zyFyRQSaSEI&list=PL4E3463842B01E133
5.) Re-focusing a person’s individual investment objectives and really figuring out the goal of their investments gets totally overlooked by the sales machines out there. A lot of clients in are stressed because they’re comparing their investments to unrealistic expectations or expectations that aren’t relevant TO THEM.
6.) Back to Robos for a second. They do generate the most inquiries from people. By they, I mean WealthSimple and that’s not to put down the other Robos out there, but it certainly feels like WealthSimple and the 7 dwarfs in Canada. Mostly because they throw an insane amount of money on advertising, which btw, is probably the best financial services branding/marketing in the country. That said, you the client, is paying for those slick spots during the Jays game.
7.) ETF’s scare people. Partly because we’ve at least heard about mutual funds for forever, whereas ETF’s seem like something new and exotic by comparison. Yes, many clients feel like ETF’s are exotic. But I think the bigger issue is mental responsibility for one’s own investment performance. No one wants it. Even with the simplicity of all-in-one ETF’s, https://www.youandyoursfinancial.com/insights-and-advice/2018/5/17/etf-autopilot
8.) Since this post is clearly coming across as if I dislike everything, some good news! Financial literacy IS getting better!!! People are becoming more engaged and asking more questions compared to when I first started. But….financial literacy in Canada, generally, is total shit.
But it’s getting better….
…..in my totally self-selecting client world.
On to some petty things
9.) The retirement I think most people are looking for comes by way of a workplace pension (in addition to CPP) and zero-mortgage combo. I still see these. They make me happy. I’m worried I’ll see less. I’ve stopped worrying about young people. Many will need to find their own way. At least they have time and technology.
9b.) Just a reminder that CPP will be around. At some point you may have to work longer to get it. You’ll most definitely have to pay more into it. But it will be around.
10.) There’s no need to bash bonds. Everyone said they rates were headed higher in 2010. And 2011. And 2013. And 2015. And 2018. They serve a purpose and no one can predict the future
11.) My vibe is that Downsizing is a myth. Getting any significant amount of home equity to fund retirement will mean (for most people) leaving the area they’re in, moving into a place far smaller than their expectations or, hopping on the reverse mortgage train, which is one of my least favourite products, but admittedly, I think will be an incredible source of growth for financial institutions over the next few decades.
12.) Comparing investment options exclusively based on fees is not a productive exercise. I probably should have said this way up top when I started talking about fees.
There’s a lot of shelf space on the internet and a place for active management, robos and passive. Part of the fun with this job is figuring out which of those options provides the most value to an individual or family.
And having the flexibility to say so.
Good morning.
Planning your income as you approach retirement is quickly becoming one of the most important and overlooked aspect of financial advice.
The entire financial system is setup for clients to make contributions to their investments (which in turn generate commissions for financial institutions) and there really isn’t a huge incentive for them to sit down with you and develop a playbook for how you might eventually start to draw down on those assets.
So let’s do that.
For most people approaching retirement, they’ve become used to relatively steady and predictable employment income for years. I’ll just say from the get-go, transitioning away from that income stream to one that relies on a mix of investment income and government benefits is a huge challenge and again, something that is often overlooked.
For most people, their income after retirement will include at least a few of the following:
Canada Pension Plan (CPP) withdrawals
Old Age Security (OAS) payments
RRSP/RRIF withdrawals
Tax-Free Savings Account (TFSA) withdrawals
Company sponsored retirement plans (DC plan)
Life Income Fund (LIF)
Defined benefit pensions plans
Figuring out how much to draw and from which accounts and in which order and how that changes over time, is specific to every household but as an example, lets look at an example with a two income household with partners currently 61 years of age. Both partners plan to retire at age 65 and have the following investments:
RRSP: $696,000
TFSA: $65,000
LIF: $95,000
Collectively, their expenses are $65,000 per year and they have a $50,000 mortgage they expect to pay down before entering retirement.
Here’s a visualization of how and when they might receive income now, through retirement and assuming they live to age 95.
Ages 61-64: The orange bars represent their employment income, which is the sole source of income for the household as they approach retirement
Age 65-69: CPP (light blue) and OAS (black) kick in, along with withdrawals from their LIF.
Age 69: RRSP withdrawals begin
Age 71+: TFSA withdrawals stop and RRIF withdrawals become mandatory
It’s worth pointing out that even small changes to your account balances, household spending, or even life expectancy can have big changes on determining the optimal solution for your retirement income needs.
Additionally, government benefits from the Guaranteed Income Supplement (GIS), Federal GST/HST credit, or Registered Disability Savings Plan (RDSP) may be applicable to your situation and also included in your income mix
Having this income available to you as you approach retirement needs to be part of the service your financial advisors provides. If it isn’t, or your unsure about your financial situation, speaking with an advice-only financial planner that provides this level of detail can save you thousands of dollars and confusion when it comes time to juggle your various retirement income sources.
https://www.youandyoursfinancial.com/services
2019 is the year you fall in love with GIC’s.
Maybe that’s a throwback feeling, but for most people, considering GIC’s as a legit investment option is a first.
So, where did they even go?
They’ve been around.
But beginning in the early-90’s and despite two market corrections which wiped out a lot of retirement savings, GIC’s have been been shunned from portfolios. Equity markets are all you hear about in the media and the prevailing message from the investment world is you’re throwing away money by investing in GIC’s.
“I bought a 5-year GIC and slept well” ~ said no one in the last 25 years.
A historical look at GIC rates (courtesy of ratehub.ca) helps frame some of the context around what happened to the perception around GIC’s.
In the decades leading up to the early 90’s, both equity market returns and interest rates (upon which GIC rates are based) were solidly positive and into the double-digits. The path for someone saving for retirement usually had them save and invest ‘till they turned 55 (retirement age once upon a time) and then buy an annuity or GIC to fund 10-15 years of retirement expenses.
By the early-90’s, interest rates accelerated their long downward trek, which wasn’t a terrible problem if you already owned government or corporate bonds and benefitted from the subsequent price appreciation (interest rates and bond prices move in opposite directions), but the incessant decline in rates to nothingburger levels has resulted in problems for those now nearing retirement.
Firstly, the amount of income you can drive from the fixed income side of your portfolio has collapsed. (In 1990, as a retiree, you could lend $100,000 to the Government of Canada and they’d pay you almost $11,000 per year. Today, that same investment gets you a whopping $1,750 per year)
Secondly, bond prices would come under pressure IF interest rates rise. The resulting loss in value would offset whatever stable interest income you’re actually generating for yourself.
Here’s the iShares 1-5 laddered corporate bond ETF as an example, where the modest 2% cash yield it generates each year has been almost fully offset by the decline in value of the bonds held in the ETF.
GIC’s are a bit different from bonds.
There is no price risk with them. Meaning, if you buy a GIC for a $1000, the amount the GIC is worth is not impacted if interest rates rise. You’ll get $1000 plus your interest payments back, guaranteed. Most (not all) GIC’s have the additional benefit of being insured through the Canadian Deposit Insurance Corporation (CDIC) up to $100,000 per account.
With non-redeemable GIC’s available for in the mid 3% range, I’d happily take those returns and chill as opposed to worrying about price, duration and credit risk with bond holdings.
With stock markets falling again on Wednesday, there’s no doubt, panic and confusion are starting to set in. Buy the dip? Cash out because this is turning into a meltdown?
Oh, and your line of credit and mortgage are going to cost you an extra $500/mo after the Bank of Canada increased interest rates?
Mutual fund bashing is all the rage these days and while I don’t agree with all of it, there’s no doubt, the fees you pay for your investments (on average, 2.4% in Canada) create a huge drag on your investment returns. But keep in mind, not all of the money your pay out in mutual fund fees goes to the investment manager, part of those funds go to the financial advisor, to, well, provide advice.
So here’s the question to ask:
What advice did you actually get?
If you currently have a $500,000 invested in mutual funds, you’re paying a total of $12,500 per year in fees, which consists of $7,500 going to the team that manages your money and $5000 to your financial advisor, to, provide you with:
Financial Planning
Home buying affordability
Retirement plans
Insurance needs to protect your family
Savings targets
Debt repayment targets
Financial goal setting
And any other household finance situations that may cause anxiety or spousal bickering.
You’ve been paying thousands of dollars per year for advice. EVERY. SINGLE. YEAR. It’s your money.
What advice did you actually get?
I started my investing career in 2006, when things were different. Amazon still sold books and most people were limited to only a handful of songs on their mp3 players and 1st generation Ipods.
Two years later when the financial crisis hit, I thought I was firmly in control of managing my own investments but had no plan, no financial objectives to guide my buy-sell decisions and as a result was overseeing a portfolio, full of stupid things. Since the financial twitterverse seems to only convey filtered stories and experiences, here’s an unfiltered view of what my personal portfolio included at certain points:
Two investments based entirely on a hot tip
A single company which made up 25% of my portfolio
An investment in a Chinese medical stock that I knew nothing about but was told by someone it would soon be bought out at a premium (it was quickly bought at a significant discount to where I bought it)
Options positions which could move 20-30% in a single day
Four Companies that were bouncing off their 52-week lows (because obviously what goes down must come back up? Or reversion to the mean, who knows)
A double leveraged inverse natural gas ETF
Oh, and I did all of the above on margin (meaning I borrowed money) because that’s what a 25 year-old studying for level 2 of the CFA exam would do.
To be clear, not all of the above investments were bad bets, some actually made money. But not having a plan in place was totally stupid and made the experience a fantastic exercise in what not to do if managing your own money.
Years later, the experience has made me a significantly better investor and still makes for valuable insights to share with friends, family and eventually clients who asked, “what do I do, (or not do) with my money”.
A small allocation (like, 1%!) of your portfolio, specifically for experimenting and yes, doing stupid things is actually an experience I highly recommend, so long as there are some learnings to extract and you're not just doing it in lieu of a trip to the Casino. A few penny stocks, or companies that might be around the corner from where you live, or investing in a stock that owns something you can pass by like a Real Estate Investment Trust (REIT) are all good options and a unique DIY investor ed exercise that just about anyone can enjoy, not just investing nerds.
No time? Not interested? Not disciplined enough? For the management fees some (definitely not all) Mutual funds or Robo-advisors charge to take care of your investments, it makes plenty of sense to leave the investment decisions to someone else to get your money working for you. All are fine options and all will steer you clear from having to decipher the head-spinning financial advice on google or twitter.
Added bonus? Avoiding all the stupid things.
Earlier this year, Vanguard, the second largest Exchange Traded Fund (ETF) manager in the world, dropped three new products which are legit game changers for investors who would love to ditch their high-fee mutual funds and find a lower cost alternative.
Three new asset-allocation ETF’s were added to Vanguard's already impressive product lineup and provide investors with a simple all-in-one solution for their desired risk profile along with global diversification and importantly, low fees.
How Vanguard has done this is sounds a little confusing, but basically, they’ve created a single ETF, which in turn owns other Vanguard ETF's.
A Do-it-yourself (DIY) investor otherwise trying to create a diversified portfolio would have to go through the task of properly identifying which ETFs to purchase, what dollar amounts of each to buy, purchase the 6-8 ETF's it generally takes to create a diversified portfolio and then periodically figure out how to rebalance their investments, all of which feels pretty overwhelming (it is) and probably not where your time is best spent.
Vanguard has taken all the hassle out by wrapping together each of those individual ETFs you would need to build your portfolio into a single product which automatically rebalances itself.
All you need to do is pick one of the three asset allocations:
Conservative ETF Portfolio (VCNS): Provides a combination of income and moderate capital growth by investing in securities with a strategic asset allocation of 40% equity, 60% fixed income.
Balanced ETF Portfolio (VBAL): Provides long-term capital growth by investing in securities with an asset allocation of 60% equity, 40% fixed income
And finally, the Growth ETF Portfolio (VGRO): which pushes for more aggressive long-term growth by investing in 80% equity, 20% fixed income
That’s it.
Vanguard has given investors an automatic transmission for those who aren’t game for the stick shifting that comes along with DIY investing.
For younger investors who constantly hear about ETFs but are nervous about buying them and managing their holdings, the VGRO ETF certainly would provide them with an appropriate investment portfolio, for those who are a bit older or perhaps a bit more cautious, VBAL replicates the 60/40 asset-allocation of your average balanced mutual fund out there and for those nearing retirement, VCNS raises the fixed income component to 60% in order to soften out exposure to the stock market.
This is a huge win for the DIY investing crowd as well. While purchasing individual ETF’s to build out your portfolio is a super interesting and rewarding experience, selecting from the thousands of ETFs already in existence and the new ones that get marketed on a daily basis is head-spinning. Then trying to figure out when and how to rebalance is another headache to deal with. Instead, Vanguard's ETFs continuously assesses the portfolio’s asset-allocation and over time, rebalances it back to its intended risk level. (So yes, someone IS watching your money)
Vanguard does all that for a fee of 0.22% which is 90% cheaper than most mutual funds sold in Canada and likely a lot more diversified than them as well.
While going the ETF route won't be a great fit for everyone, the new products from Vanguard certainly change the game. These are the Autopilot of the ETF world and provide a far more user-friendly, low-fee experience for investing and growing your money
You’re looking for financial advice. There’s something about your money that you’re not quite sure about and figure it’s probably time to speak to a human about it. Whether you get a recommendation from a family member or friend, the experience continues to be pretty consistent. The advisor will sit you down, talk personal finances, possibly offer you a new line of credit or travel rewards card and before you know it, the glossy pamphlets are on the loose with a clear pitch; invest with us, your money will only go up in value, you’ll be on the path to riches, sign here.
It all sounds like it makes sense, but in reality it's a lot of information and understanding what your money is invested in is difficult. Most people have no idea how to assess their investment performance, both return and risk, or how much you’re paying every year in fees or commissions. But that travel rewards card means you get access to the swanky lounge, so that’s a thing, right?
We put way too much trust in financial institutions and it’s perfectly clear, why. They went all in on calling their mutual fund sales pitch, “advice” and not providing much, if any, actual advice or planning.
Even with the proliferation of Robo-advisors, exchange traded funds (ETF’s) and low-cost (D-series) mutual funds, the majority of the financial world seems stuck in 1994, pushing nothing other than high-priced mutual funds when so many alternatives are available. It sorta feels like, if HMV still existed today and was trying to convince you that buying a $16 CD was the only way to listen to music.
But it’s 2018 and it’s never been better for regular people to invest their savings into a globally diversified portfolio at a significantly lower cost than high-priced mutual funds (these are usually the A series funds that have an embedded fee over 2.5%, which, yes, is a lot!).
For starters, there are D-series mutual funds, which are identical to their higher priced A-series siblings. The D-series are half the cost to own (1.25% compared to 2.5% on average for the A-series varieties) and only available through your bank’s online brokerage. Because you can only invest in D-series funds online, you lose access to the financial advisor, which, may not be a bad thing since you’re tired of sales pitches, right? Hiring an independent financial planner who will really walk you through your budget and how to reach your financial goals is an effective combination that I highly recommend.
Then, there’s the new kid on the block, Robo-advisors, which in many ways are similar to a mutual fund in that, both monitor and rebalance a portfolio of investments for you and charge a fee for doing so, usually, less than 0.75%. While some Robo-advisors offer basic financial planning, it’s far more accurate to think of Robo-advisors, as Robo-Investment Managers. They’ll manage your investments, but are generally a bit light on providing detailed financial advice. That’s probably ok if you’re single, in your 20’s and only have you to worry about but in more complex situations like family planning, caring for a parent or considering a career switch, you may be looking for more detail and dialogue about what to do. Again, hiring a fee-based financial planner who will walk you through your budget and how to reach your financial goals is an effective solution that has become increasingly popular as the number of independent financial planners increases.
Finally, while not for everyone, managing your own portfolio of low-fee ETF’s is an option. Yes, there’s an ETF for just about everything these days from marijuana to electric vehicles, which can lead people to feel like choosing the right combination of ETF’s is an impossible task. Fortunately, Vanguard has simplified that task by creating three new, asset-allocation ETF’s which do the work for you and are based on your risk level:
Growth (80% equities)
Balanced (60% equities)
Conservative (40% equities)
(In case you’re wondering, I’m not affiliated with Vanguard in any way. Their new ETFs are the only all-in-one ETF solution, which, in my opinion is one of the best financial products to come out in years along with Robo-Advisors)
Access to cheaper investment products is only half of the ongoing disruption in the financial services industry, the other half is the growing army of independent financial planners and money coaches who don’t sell products and provide truly unbiased financial advice. Most people go to an advisor because they’re feeling unsure about their finances and are just trying to feel better about their money. With investment fees on the decline and access to people who you can have real money talks with, its never been better to find a financial solution that works for you.
