The Joy of Investing
I was talking to someone the other day, and we were both sort of lamenting the long gone days of adolescence. I remember being 17 years old, working a part-time summer job at Bonanza. While summer was only two months off, a good chunk of that was spend up at Cultus Lake, working as a dishwasher 20 hours or so a week, and spending as much time with my friends as possible. As a kid, you really don’t have to worry about where your money is going to go since you really don’t have much to spend it on, other than the world’s crappiest car and the occasional trip to the waterslides.
Unfortunately, us adults have to take things a bit more seriously. If nothing else, we’re all told that we have to start saving money as soon as possible for retirement. Our generation is going to be one of the first one to test that theory in its entirety, so it’ll be interesting to see just how it ultimately plays out.
Prior to leaving Vancouver, I signed up with a financial planner to try and get all my finances in order. The person who made the recommendation is a friend, so I was happy to go along and test it out. I met with the person a few times in Vancouver, moved my RRSPs over (which I would have had to do anyways, since I quit my job in Vancouver and my funds were managed through a group plan at work). He made some recommendations, I went along with most of them, and for the most part things went pretty smooth.
Since leaving Vancouver though, I unfortunately haven’t had much luck getting together with that planner as much as I wanted. A few times I was in the city, and unfortunately he wasn’t around to meet up. Phone calls work, but when the decisions of those phone calls affect finances, I’d much prefer one on one conversations to talk things through.
Anyways, after thinking about it for a long time, I decided the other day to sever the relationship and do something else. I was happy with all the advice I received and I wish the other person no ill will, I just didn’t think having a planner based out in Vancouver was working for me anymore.
I’d say about 50% of the books I’ve read in the last year have been related to investing and finances, and I no longer feel that managed mutual funds are a good investment. The majority of the funds in Canada have management expense ratios (MERs) or over 2.5% (which is where some of the commissions to financial planners comes from). That basically means if a fund makes 7.5% in a year, 2.5% of that goes to the fund management, and you’re left with only 5%. In fact, over 80% of managed mutual funds under-perform the stock market ever year. If you look at managed funds over a longer period of time, say 5 years, I think it jumps to 96% or so. To that end, most people nowadays recommend investing in index funds (at least those people without a vested interest in investing in managed mutual funds), which are funds that represent the majority of the stocks in the market, and consequently have very low MER (0.3 – 0.5%), since there’s really no active management. An example of an index fund would be the S&P 500, which represents a lot of the large-cap stocks in the US.
In terms of index funds, there are a few available in Canada, but many have higher than average fees (which is strange, since index funds are supposed to have low fees by definition). The two are ING Direct’s streetwise funds (which are actually pretty good, but have a MER of 1%), and also the TD e-Series funds. Since I do the majority of my banking through PC Financial (which was one of the first discount banks in Canada), I’m a big fan of ING Direct (and in fact, we do a bit of our business banking through them). That said though, the point of index funds is to reduce management costs, so I’ll probably start using TD’s e-Series funds. I’ve been meaning to open an ING Direct for a while now, so I may open one up and simply use INGs TFSA for now.
I’m sure it’ll be a few weeks before I have everything in order again, but I already feel a bit better moving in the direction I’m going in. The nice thing about index funds is that you buy them and essentially just hold onto them forever (since they aren’t really managed), so they aren’t anything you ever have to really stress about. You should rebalance your portfolio every year or so, but that generally only takes a few minutes. For example, if you have four index funds at 25% Canadian, 25% US, 25% Bonds and 25% International Equity, after the year is over you may find that, due to growth/losses, you have 35/20/20/25. In that scenario, you’d sell off 10% of your Canadian equity and top up the US and Bond funds so they are all roughly the same. Other than returning you to a balanced portfolio, the rebalancing process also forces you to buy low and sell high, which is the right away to manage investments.