Investment Advice.

[swestrup]

Index Funds are pretty much the way to go for small investors. I've known this for some time, but I've never seen it better put than in the article I just linked to.

Now, the only question is: what are the best low-fee Canadian Index Funds? I did some quick googling and found this table, but you'll note that .31 percent is as low as they go, which is more than 50% higher than the .19 percent the article recommends as a cap.

I also came across a rant that talked about this. It seems that Canadian MERs (Management Expense Ratios -- ie fees) are much higher than elsewhere in the industrialized world. In fact, in a (rather opaque) study of 18 Countries, we came out on top with the highest fees.

In fact, the author of that rant suggested that the way to go in Canada to avoid high MERs is to instead invest in Exchange Traded Funds, which I had never heard of before. I'm going to have to look into that.

Comments

[wlach.livejournal.com]

I've been thinking about moving the bulk of my RRSP into index funds for a while now. I think the article that you linked to sums things up pretty well, but here's some things that I think may be worth bringing up (and/or re-emphasizing):

1. In general, it's worth pointing out that the model of index investing assumes that the economy as a whole will continue growing in absolute terms over the long term. My comfort level with this assumption is not great (then again I'm not sure what better use there is for any extra cash I might have on hand).
2. Even given this assumption, index funds aren't going to make you rich overnight or without significant investment. They take advantage of the fact that the market will, on average, grow at a modest rate OVER THE LONG RUN.
3. Many actively managed funds will keep holdings in things like the money market (or other fixed income instruments), which can protect their value in the case of a decline in the market. If there's even the remotest chance you might need to withdraw some of your investment holdings (e.g. in case of prolonged unemployment), it only makes sense for you to do the same.

It does indeed sound like ETFs are the way to go, except that (1) you need to buy them directly on the stock market and (2) they require periodic baby-sitting (to re-invest their dividends, or something...). This all sounds like too much hassle for me right now relative to the benefits (which, remember, will only accumulate over the longer term).

[swestrup]

> It does indeed sound like ETFs are the way to go, except that (1) you need to buy them directly on the stock market and (2) they require periodic baby-sitting (to re-invest their dividends, or something...). This all sounds like too much hassle for me right now relative to the benefits (which, remember, will only accumulate over the longer term).

I liked the suggestion of getting a no-load low(ish)-mer bank mutual fund, of any kind that suits your fancy, with an automatic payment system into it. Once per year (typically around tax time) you dump it all into your ETF brokerage account, on top of any accumulated dividends, and invest the whole thing in ETFs. That means you only have to mess around with them once per year. You will be paying higher MER on the bank mutual fund, but as you'll never keep much money in it, they won't be very high.



Sounds easy enough to me.

[scjody.livejournal.com]

that the model of index investing assumes that the economy as a whole will continue growing in absolute terms over the long term

True, but so do the vast majority of investments. Our entire financial system is based on the assumption you mention. Even sticking your money in the bank is only good if the bank remains in business[*].

If you want to invest for the (very real) possibility of economic failure, you need to look outside banks. Land and real estate is good, if it's defendable or if you believe state institutions will be around to help you defend it. Precious metals, weapons and ammo, fuel supplies, etc. are what you really want to invest in for this case.


[*] The CDIC does insure against this, up to $60000 per bank account. However, this is to guard against the failure of individual banks. I strongly doubt they are large enough to insure against the collapse of the economy as a whole.

[wlach.livejournal.com]

One interesting theory I heard from a fellow called Nate Hagens (look him up at theoildrum.com) is that in the future things like social capital and skills capital are going to count just as much (if not more) than financial capital. That is, the best hedge against financial decline isn't any particular asset (whether physical or abstract), but the friends you have and the real skills you have to offer.

If the world truly goes to hell, I'm doubtful that real estate, ammunition, and fuel supplies are going to save me. Hence my not feeling too terrible about keeping most of my spare money in investments: I figure if that happens, I'm going to have figure out some kind of new plan for myself (and my loved ones) in any case.

[scjody.livejournal.com]

The social/skills capital thing sounds very true assuming a gradual decline. We might end up with that, assuming governments don't do too much stupid (e.g. ostrich head in the sand) stuff. I'm just not convinced of that :)

I'm with you on the second point - I'm mostly investing in the stock market (via mutual funds) too - but I question if I shouldn't be doing something else as well. "What" is always my question though. I keep thinking I should learn more about recent history where "civilized" places collapsed, like in the Bosnian War. What would maximize my chances of survival (and the chances of the people I care about) if the entire world ended up like that in a relatively short period of time?

[joenotcharles.livejournal.com]

Every time I sit down to move money into index funds, I bog down on the "choosing a broker" bit. I'm paralyzed by the fear of choosing the wrong one and then finding out they don't have the funds I actually want to buy, or something. I was thinking about signing up for questrade.com, but I chickened out at the last minute.

What broker do you use, and is there anything I should know that's not obvious ("go for the lowest rates, as long as they're reputable and get good reviews - it's not worth shaving off an extra buck if it means your money will disappear into a black hole")?

[wlach.livejournal.com]

If you just want mutual funds that follow the index (the easy approach), just get them through your bank. As opposed to independent financial advisors (aka "thieves"), they don't frontload the sale with fees.

[swestrup]

The problem with this is that Banks charge annual fees that are more than double what they should be.

[wlach.livejournal.com]

On investment accounts? I'd need to double check, but my understanding from my bank (RBC) is that they don't charge any fee for my investment accounts, beyond their share of the MER. Note this only applies to mutual funds (which includes money market accounts).

[scjody.livejournal.com]

TD doesn't charge me anything beyond the MER to invest in eFunds. The money comes out of an account at another bank via direct debit (voided cheque.)

[metawidget]

That's what I've got too, and I grilled my account manager pretty well before committing. The MER, as uninspiring as it is, is the only fee you pay.

My RRSP is a mix of nice, boring money market and their Canadian index fund, which is doing not too badly so far.

[swestrup]

Back when I had money to invest, I didn't know about discount brokers and went through RBC. I wouldn't recommend them. They would reset my online password if I didn't log in for three months. Since the plan was to only log in once per year, that didn't work too good.

I guess I'll just spend time googling around to see what I can find, when I start investing again.

[scjody.livejournal.com]

Back when I first started investing, a friend lent me a book that supported the same conclusion reached in the article: active investing rarely outperforms the index, and even when it does, the management fees charged by active funds wipe out any gains.

I've been investing in TD eFunds because of a similar MER survey a few years ago. I've never really looked into ETFs because they look a lot more painful to manage.

I've heard than in general, Canadian MERs are higher than US MERs, so I'm not surprised by the table you linked to. I don't know what to do about this as an individual investor other than choose the fund with the lowest MER.

It's hard even to know though. I've tried to get MER information from the people who run my employer's pension plan and I can only find it for about half the funds offered.

[wlach.livejournal.com]

The MER can always be found in the fund's prospectus.

[scjody.livejournal.com]

Right - any idea how I can get that? The company that administers the pension (Sun Life Financial) says everything I need to know is in the guide they emailed me, which has only a summary of the prospecti. The institutions that actually administer the funds have no information on their website about the funds. For example, an option is "TDAM Canadian Equity Index Segregated Fund". That looks similar to the TD eFunds Canadian Equity Index, but it's not exactly the same, so I can't assume the MER will be either.

Likely the answers are around somewhere, but getting them will involve a few hours on the phone with Sun Life and/or banks. I'm just saying it's not nearly as transparent as it should be.

[wlach.livejournal.com]

Hmm, strange. I always kind of assumed you could just get the prospectus from the public web site for the holder of the fund, though upon examination I guess that's not always true (at least if my few minutes with google is any indication). My bank always sends them to me whenever I open up a new investment account, so I assumed that they were readily available.

One thing to check out might be morningstar.ca, which (I think) has a brief summary of every Canadian fund out there, including their MER.