# Indexing - Why Not?



## Simon Says (Jan 5, 2013)

Hello all, I'm new to the investing world and have been reading for a few months now trying to determine what I should do with some free cash flow. I've read the wealthy barber returns and the millionaire teacher, plus a few others. I realize index investing is matching market returns and not trying to beat them, I'm ok with that. I keep trying to determine though what the down side is. It almost sounds too good to be true. Consistent returns, low management fees (in most cases), not a lot of effort on my behalf, a simple re-balancing strategy. Why doesn't everyone do this? Am I missing something? I keep looking for the gotcha I guess. But it seems to me the hardest part is to determine how much you want in bonds and which index funds to actually select.

So if you can, please tell me where my blind spot is, I'm trying not to make any costly mistakes.

Thanks,

Simon


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## MoneyGal (Apr 24, 2009)

Why don't more people index? 

1. Almost no one sells indexing vehicles / promotes indexing (relative to the selling/promotion of active management), so fewer people know about it. 
2. All kinds of behavioural biases: "why would you settle for second-best," "my guy is really good, I believe he can beat the market," "I am really good, I believe I can beat the market," "I only choose funds that beat the market."


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## newfoundlander61 (Feb 6, 2011)

For me i hold nothing but Index funds for long term investing. There are pros and cons to holding all asset classes. My goal is to save for retirement and not have to check the newspapers everyday to check stock prices. In addition the fees added up by buying and selling add up and eat into returns so if you are a newbie take the slow and easy approach like indexing. I never try to beat the market because in the end I usually loose out so indexing gives me market returns which is fine by me.


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## james4beach (Nov 15, 2012)

Simon Says said:


> Why doesn't everyone do this? Am I missing something


A few ideas why everyone doesn't index, and I think #1 and #2 are the big ones

1. The power of marketing. Index funds don't make a lot of money for fund companies (I mean, XIU has 0.18% MER...) so there's a huge incentive to pitch mutual funds that aren't indexes. Any time a fund salesmen or pension plan agent has the opportunity, they will try to sell the customer a product a non index product. It's more profitable for the fund company.

2. Many people (including professional fund managers) think they can beat the market. And some can! Others can't. But people tend to overestimate their ability / likelihood to beat the index. If you get a bunch of first time stock investors together, you'll find the common theme is usually that each guy & gal is going to pick some real winning stocks, and of course they think they will all beat the index.

3. Historically, meaning maybe before 2000, the world was a less heavily indexed place. These days markets are extremely highly correlated, globally, and very much traded via indices. The electronic markets have become increasingly indexed over time which means that different stocks and asset classes tend to now move all together, and move with the index. Non-index funds may have made more sense pre 2000 when there was less global correlation, and more opportunity (back then) to actually find an outperforming investment. Some people may remember those old days and that may keep their faith high in non-index funds.

4. For some people, just buying the index feels like giving up. They don't want to give up... they want to keep striving to beat the index (and doing lots of work to try and achieve it)

5. Some people have specialized expertise and good reason to think that one investment is superior to another. (Example being Warren Buffett and Charlie Munger at Berkshire, or perhaps a guy who specializes in corn commodity futures). I'll emphasize this is a very rare category of people. Such people would not index because they really should be able to beat the index. Here is what Buffett writes in the 2012 annual letter and it's a very honest statement about index investing



> It’s our job to increase intrinsic business value ... at a faster rate than the market gains of the S&P. If we do so, Berkshire’s share price, though unpredictable from year to year, will itself outpace the S&P over time. *If we fail, however, our management will bring no value to our investors, who themselves can earn S&P returns by buying a low-cost index fund*


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## james4beach (Nov 15, 2012)

I'll add another reason, relating to my reason #3

Starting with Greenspan and continuing with Bernanke, there's been a new kind of central bank activity (again since around 2000) basically focused on inflating assets. Many top investors, including Buffett, have observed that it's becoming increasingly difficult to find good deals out there and increasingly difficult to find under-priced assets. This problem continues under ZIRP and QE scenarios.

In other words it's pretty hard to actually find something that's a screaming good buy. When money (from the central banks) floods into markets everywhere, it elevates prices, and nothing is a screaming good buy any more.

This means that the job of the non-indexers keeps getting harder. (The job of value investors, or active mutual funds, or hedge funds). This is the current reality, thanks to our celebrated central bankers.

Non indexers (the value guys) are remembering the older times, when their job was easier. It could be they think we'll go back to those times any moment or that all this ZIRP & QE is a passing fad.


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## GoldStone (Mar 6, 2011)

Simon Says said:


> I realize index investing is matching market returns and not trying to beat them, I'm ok with that. I keep trying to determine though what the down side is. *It almost sounds too good to be true.*


"It almost sounds too good to be true" is one of many reasons why more people don't do it. People discard indexing because it sounds too simple.

IMHO, here's the main reason:

1. DIY investors are a minority. The majority of people are afraid to invest on their own. They invest through financial advisors.
2. At the same time, no one wants to write a check for financial advice. People expect it to be "free". Advisors' compensation is buried in the product (high MERs, trailer fees).
3. Financial advisors can't build their business around index funds. They have to use expensive active funds that pay fat trailer fees.


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## Simon Says (Jan 5, 2013)

Thank you all for the great comments, to me it doesn't feel like giving up, it feels like security! (I'm a bit conservative). As I pick my indexes I will post my ideas here and I look forward to your insight.

Simon


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## neoabraxas (Mar 4, 2013)

I think most people are simply afraid that when an index tumbles it will take their hard earned savings with them (quite true) and that active management may help them curtail their losses (not true)


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## GoldStone (Mar 6, 2011)

neoabraxas said:


> I think most people are simply afraid that when an index tumbles it will take their hard earned savings with them *(quite true)*


It's only true if they sell at the bottom.


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## neoabraxas (Mar 4, 2013)

GoldStone, not all indexes always bounce back. Consider NASDAQ after the nineties or NIKKEI after the eighties. Or even DIJA after the Great Depression. It took more than 25 years for it to climb back to the 1929 level. That's a long time to wait for your nest egg to hatch.


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## james4beach (Nov 15, 2012)

neoabraxas said:


> I think most people are simply afraid that when an index tumbles it will take their hard earned savings with them (quite true) and that active management may help them curtail their losses (not true)


I'm not sure how common this is but I know people who got burned on sharp losses from index funds, and are now wary of index funds because the losses were more severe than their other mutual funds. They walked away with the conclusion, "index funds are more dangerous than regular mutual funds".

These people didn't grasp that an index fund gives 100% stock exposure and MUST be paired with cash/fixed income, in order to give an equivalent experience to the one-size-fits-all mutual fund (balanced fund, etc)


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## james4beach (Nov 15, 2012)

I'm going to spell out an example, because I fear that some people have way too much stock exposure when they use index funds. My own dad made this mistake.

Let's say Joe built up 100K of investments through his career, that sit in a variety of disjoint, generic mutual funds (one size fits all kinds of funds, balanced, maybe some 60/40 income funds).

Joe learns about index funds and starts to overhaul his portfolio, to move to all index funds. At first he's tempted to put the 100K into: Canadian index, US index, international index. But this would be far riskier than his original mutual funds, and could lose much more money.

His original mutual funds, when you look across all of them, had 50% in fixed income and 50% in stocks. So the correct way to overhaul it would be to put 50K into savings accounts & GICs, and 50K in the stock index funds. Now it will perform about the same as the old mutual funds, with equivalent stock exposure.


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## MoneyGal (Apr 24, 2009)

...but this is an asset allocation issue, not an issue with index funds...


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## james4beach (Nov 15, 2012)

MoneyGal said:


> ...but this is an asset allocation issue, not an issue with index funds...


Very true. I don't blame index funds... they're a tool. The investor has to know how to use them properly!


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## Rusty O'Toole (Feb 1, 2012)

Some of the most successful investors in the world endorse index funds. The conversation goes something like this:

What's the best way to invest?

Learn my methods.

What if I don't want to do that? What is the next best?

Index everything.

86% of mutual funds underperform the stock market averages. This means, if you just buy index ETFs you will beat most of the experts. A lot of it has to do with the fees you save, which really chew into your returns over a period of time.

So, index funds look pretty good.

Downside: It's boring. It's human nature to believe you can do better than average. But, chances are you can't. If most of the top experts in the field can't beat the averages what chance do you have?

Second, there will be times (like 2007 - 2008) when your account takes a hell of a bath. You have to be prepared to ride out these periods, or, watch the moving averages and get out when the 50 day crosses the 200 day and get back in when it does the reverse.

Basically indexing is boring and contrary to human nature but it works.


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## neoabraxas (Mar 4, 2013)

"Second, there will be times (like 2007 - 2008) when your account takes a hell of a bath. You have to be prepared to ride out these periods, or, watch the moving averages and get out when the 50 day crosses the 200 day and get back in when it does the reverse." 

That's not passive investing anymore.

Also with regards to risk, it's not just an asset allocation issue. In 2008 most asset classes took a bath. Initially even US LT bonds were in the toilet until the capital chased them looking for safety. It's impossible to predict which asset classes may pick up slack when the next black swan event hits the market. We live in the time of ever increasing correlations which make it harder and harder to build an all weather portfolio. 

And no, I do not have any good answers myself


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## james4beach (Nov 15, 2012)

Rusty O'Toole said:


> Second, there will be times (like 2007 - 2008) when your account takes a hell of a bath. You have to be prepared to ride out these periods,


Why would the index funds do any worse than mutual funds during the 2008 crash? Assuming the stock vs fixed income allocation is equivalent...


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## fatcat (Nov 11, 2009)

i used to be an index investor and have gradually changed to direct ownership of dividend companies and two indexes (real estate and utilities) which i plan to sell and morph into some of their underlying stocks ... 

both dividend/stock picking are acceptable ways to invest ... 

if i were to go back to indexing i would avoid the "speciality indexes" (like real estate and utilities for example) and go for the fewest, broadest, cheapest indexes ... 

if i was under about 45 i would definitely go with all low cost indexes ... 

for anyone with a long time horizon (20+ years), indexing is the only sensible way to go

99% of people will under-perform the market over 20 years


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## GoldStone (Mar 6, 2011)

neoabraxas said:


> GoldStone, not all indexes always bounce back. Consider NASDAQ after the nineties or NIKKEI after the eighties. Or even DIJA after the Great Depression. It took more than 25 years for it to climb back to the 1929 level. That's a long time to wait for your nest egg to hatch.


You cherry-picked a few bad examples.

NASDAQ is a narrow index that tilts heavily to one sector: technology.
Solution: Invest in broad indexes that diversify across sectors.

NIKKEI is a single-country index.
Solution: Diversify geographically.

DIJA after the Great Depression is a more interesting example. It's very true that stocks can do badly for a long time.
Solution: Don't bet heavily on stocks. Build a balanced portfolio that includes other asset classes. Rebalance between asset classes to sell high, buy low.

More advanced solution: Pay attention to stock valuations. If market P/Es are completely out of whack like they were in the late 1990s, consider tactical changes to asset allocation. For example, shift from 60/40 to 40/60.

All that said, there are no guarantees. Indexing captures market returns. If markets do badly for a long time, so will you.


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## james4beach (Nov 15, 2012)

fatcat said:


> i used to be an index investor and have gradually changed to direct ownership of dividend companies and two indexes (real estate and utilities) which i plan to sell and morph into some of their underlying stocks ...


So basically, everything you own is high-dividends  I don't want to veer off topic, but you may be 100% exposed to a group of stocks that have become overvalued due to extreme popularity during ZIRP & QE
Article: Why a high-dividend strategy is dangerous


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## neoabraxas (Mar 4, 2013)

GoldStone, I could counter by saying that picking something like S&P500 is also cherry picking. geographic diversification does not help during a crisis like 1929 or 2008. Most stock indexes were in the toilet. I agree that being to stock heavy is a costly mistake. I'm just not sure there are enough loosely correlated asset classes to ensure good returns over a long run. Bonds which were traditionally the hedge of choice for individual investors are really expensive today thanks to ZIRP and ditto for gold and REITs. Heck, junk bonds yield below 6% nowadays!


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## fatcat (Nov 11, 2009)

james4beach said:


> So basically, everything you own is high-dividends  I don't want to veer off topic, but you may be 100% exposed to a group of stocks that have become overvalued due to extreme popularity during ZIRP & QE
> Article: Why a high-dividend strategy is dangerous


james, you and i apparently are concerned that the other might be over exposed  ... you think i am overexposed to dividend stocks and i think you are overexposed to underperforming assets relative to inflation (cash and gic's) 

i own a mix of dividend stocks, growth stocks, bond funds, reits, gic's and cash ...

you are taking on risk by "avoiding risk" and concentrating all of your investments into just 2 asset classes and thus risk seriously underperforming the market and inflation and watching your capital erode


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## GoldStone (Mar 6, 2011)

neoabraxas said:


> GoldStone, I could counter by saying that picking something like S&P500 is also cherry picking. geographic diversification does not help during a crisis like 1929 or 2008. Most stock indexes were in the toilet. I agree that being to stock heavy is a costly mistake. I'm just not sure there are enough loosely correlated asset classes to ensure good returns over a long run. Bonds which were traditionally the hedge of choice for individual investors are really expensive today thanks to ZIRP and ditto for gold and REITs. Heck, junk bonds yield below 6% nowadays!


You raised advanced portfolio construction issues. I share your concerns & pain. But we have veered widely off topic. These portfolio construction issues have little to do with indexing.

Also, these advances issues matter a lot more to older investors with large portfolios than to young investors who are just starting out.


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## MoneyGal (Apr 24, 2009)

GoldStone said:


> You raised advanced portfolio construction issues. I share your concerns & pain. But we have veered widely off topic. These portfolio construction issues have little to do with indexing.
> 
> Also, these advances issues matter a lot more to older investors with large portfolios than to young investors who are just starting out.


But they are WAY more fun to discuss! Please carry on. :encouragement:


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## My Own Advisor (Sep 24, 2012)

To answer the original post, I guess I should index more because it makes so much sense.

I suppose I own a hybrid of ETFs and dividend stocks because I guess dividends are more psychological. I see the money coming in and adding to my income every month. I don't own GICs and probably never will.


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## Sampson (Apr 3, 2009)

A few points because it is clear from these types of discussion that we are define many of the key terms and parameters differently.

1. Index investing does not result in consistent returns. - A well balanced portfolio that includes asset classes that show low or negative correlation will result in more 'smoothed' (lower deviation) returns, but they are more consistent.

2. Indexing does not equal passive, and picking stocks does not equal active. Indexing means not picking individual securities is all. One can easily use an indexing approach combined with tactical asset allocation, or other market timing strategies to have an active approach. Alternatively, one can pick 10 individual holdings, and only purchase when the % of each holding falls out of target, a passive stock picking approach.

I think it is critical to separate the indexing strategy from active/passive investing.

Of course if you refer to the 'couch potato' style, then this implies a passive approach using indexing, but not everyone means this all the time.


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## Sampson (Apr 3, 2009)

I wouldn't exactly call them 'advanced portfolio construction issues'

At the heart of these strategies is a relationship with MPT. Whether it is a full, partial, or negative subscription to the ideas of MPT, this is a fundamental and critical aspect, especially when one is using a comparison metric, like an index to compare real or potential returns, and whether one can take the risk (defined here as variance of the portfolio value) of a specific strategy.

I personally believe that this is one of the first things people need to understand, otherwise they will go all into a higher risk asset class (most people probably start with 100% equities), or all into a low risk asset class (GICs, cash equivalents etc.). I would argue that these actions can result in big time pain for investors. If an all GIC investor sees the market booming, they may take actions like chasing market returns and getting in over their heads. If an all equities investor gets pounded by a market crash, they may turn away from equities and suffer lower returns in the future because they lose their risk appetite.


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## Belguy (May 24, 2010)

I used to be a more ardent supporter or 'Easy Chair' investing than I am now.

My own diversified portfolio of primarily index products has gained exactly 2.1 per cent over the past 24 months.

This former 'Couch Potato' promoter's own experience is that I'm not getting rich holding this kind of a portfolio. We are in a period where the indexes are moving sideways to slightly lower over the long term and I don't see that changing anytime soon.

If I had to do it all over again, I would probably have built a portfolio of 12 to 20 dividend growth stocks well diversified by sector. Dividends may be one of the few ways to make money in the markets these days.

Anyway, that is my experience. We grow too soon olde and too late schmart.:chargrined::dispirited::sour::crushed:


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## thenegotiator (May 23, 2012)

Belguy.
sorry to hear about ur dog.
i caught up with the fact just lately.
take care


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## fatcat (Nov 11, 2009)

Belguy said:


> I used to be a more ardent supporter or 'Easy Chair' investing than I am now.
> 
> My own diversified portfolio of primarily index products has gained exactly 2.1 per cent over the past 24 months.
> 
> ...


it seems to me that you present one of the best arguments for dividend investing (not that i am saying either/or, for long time horizons, indexing is probably best) the so called bird-in-the-hand argument ... if we have a prolonged sideways market of little or very slow growth you are least getting paid while you hold your equities ... this doesn't matter much to 35 year olds but matters a lot to 70 year olds i think ... i agree belguy, diversification across asset classes is critical and within equities as well


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## doctrine (Sep 30, 2011)

Both index investors and individual stock purchasers should consider value. Just because you index, does not mean you should invest blindly. I would not purchase an index with a P/E of 25 or 30, just like I would not purchase a stock at that value either. This may mean that at times, you don't invest because future returns may be low.


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## Rusty O'Toole (Feb 1, 2012)

james4beach said:


> Why would the index funds do any worse than mutual funds during the 2008 crash? Assuming the stock vs fixed income allocation is equivalent...


You remind me of a story about Jimmy Durante. He was rehearsing a sketch with a young actress. He said

" When you hear your cue, come in the door, wait for the laugh, and walk over to the table".

She said " What if they don't laugh?"

He said " Don't worry, they'll laugh"

"But what if they don't? What if we come out here one night and nobody laughs?"

"In that case" he said, "We're all in the terlet together".

Especially these days it seems all asset classes are correlated. When the stock market stops laughing, we're all in the terlet together. Dividend stocks, growth stocks, utilities, resources stocks, everything. And it doesn't matter who your your adviser is or whose fund you buy unless you are lucky enough to pick the one guy out of 3000 who outguesses the market.

So, you have two choices. Ride 'em all the way down and hope they come back up. Or bail when you smell smoke and get back in when it clears.

Look at any good stock web site for a chart of the S&P 500. Look what would have happened if you got out when the 50 day and 200 day MA crossed and got back in when they crossed the other way.

I'm not saying this is perfect but it beats sitting there and taking it like a little soldier.


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## Rusty O'Toole (Feb 1, 2012)

neoabraxas said:


> "Second, there will be times (like 2007 - 2008) when your account takes a hell of a bath. You have to be prepared to ride out these periods, or, watch the moving averages and get out when the 50 day crosses the 200 day and get back in when it does the reverse."
> 
> That's not passive investing anymore.
> 
> ...


It's not passive investing but it is close. Index everything, ride 'em all the way up, all the way back down, and all the way up again and on a long enough timeline you will end up OK.

Bail at or near the bottom, and get back in when everything looks rosy again (near a new top) and you will handily underperform the market. This is what our giant brains, or human nature tells us to do.

Or, watch the moving averages and get in and out of the market accordingly. This will require you to make one trade a year or less. If you want to sniff that that is, technically, not passive investing then go ahead and trust your local bank manager to invest your money for you. They have some mutual funds that make a very good return - for the bank.


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## Belguy (May 24, 2010)

Most of my miniscule returns so far this year have come from my bond investments.

In fact, come to think of it, most of my long term returns have come from my bond investments.


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## lonewolf (Jun 12, 2012)

Look at any good stock web site for a chart of the S&P 500. Look what would have happened if you got out when the 50 day and 200 day MA crossed and got back in when they crossed the other way.

I'm not saying this is perfect but it beats sitting there and taking it like a little soldier.[/QUOTE]

Rusty

Thanks for the info was very interesting, I checked it out, I could only go back to about 1994, what realy stood out was a little differnt way to use those averages.

Go long when the market is above both the 50 day, 200 day & both averages are in an up trend.

Short the market when the market goes below both the 50 day, 200 day moving averages & those moving averages are in a down trend.


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## lonewolf (Jun 12, 2012)

Rusty

I checked using your method with the moving averages for gold & the results would have produced a positive outcome.


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## james4beach (Nov 15, 2012)

fatcat said:


> james, you and i apparently are concerned that the other might be over exposed  ... you think i am overexposed to dividend stocks and i think you are overexposed to underperforming assets relative to inflation (cash and gic's)


lol that's true, we're both very thoughtful though... both concerned for the other's sake.



> you are taking on risk by "avoiding risk" and concentrating all of your investments into just 2 asset classes and thus risk seriously underperforming the market and inflation and watching your capital erode


It's true, I'm taking on risk. But there is a motivation behind it. I have a conviction ... a belief based on research and fundamentals ... that stocks are over-valued (I'm bearish). Therefore I choose to sit out and wait and forego stock returns.

So I know the risks I take by mostly avoiding stocks, but I choose to do it. In a way, I am trading the market. If stocks fall in the coming years, I come out ahead. If stocks rise, then I come out behind.


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## andrewf (Mar 1, 2010)

Belguy said:


> Most of my miniscule returns so far this year have come from my bond investments.
> 
> In fact, come to think of it, most of my long term returns have come from my bond investments.


Do you have any exposure to S&P 500? It's up about 10% YTD.


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## Eclectic12 (Oct 20, 2010)

Simon Says said:


> ... I realize index investing is matching market returns and not trying to beat them, I'm ok with that.
> 
> I keep trying to determine though what the down side is ...


The down sides are that:

a) in addition to the investments that do well as part of the index, there will be some investments that are crap and will be dropped from the index.

b) when the market in general is falling, a savvy active manager can cash in any gains, limit losses or may have already shifted into cash. The index fund drops, where selling is the only option to limit drops as the index is defining the drop.

c) The investing is mostly on auto-pilot so less attention is paid to the fluctuations which means less buying/selling opportunities.




Simon Says said:


> ... It almost sounds too good to be true. Consistent returns, low management fees (in most cases), not a lot of effort on my behalf, a simple re-balancing strategy.
> 
> Why doesn't everyone do this? Am I missing something? ...


I'd bet that most investors are still using a financial ad visor or "free advice" sales rep who typically don't make as much money with this type of investment.

Then too, DIY types seem to want more control that this method uses.


Also bear in mind that cheap MER index or ETF products are relatively newcomers to the investing party, just as cheap commissions and/or commission free ETFs through a broker.


Cheers


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## kcowan (Jul 1, 2010)

I am an individual stock dividend investor. But Belguy has stimulated a question for you couch potato people. Are there low cost ETFs that return the dividend yield in addition to the movement of the market index (S&P et al)?


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## james4beach (Nov 15, 2012)

kcowan said:


> I am an individual stock dividend investor. But Belguy has stimulated a question for you couch potato people. Are there low cost ETFs that return the dividend yield in addition to the movement of the market index (S&P et al)?


I don't follow. belguy wrote: "most of my long term returns have come from my bond investments."

He didn't say dividend yield, he said bond investments (fixed income). If I were to rephrase your question as, is there a low cost ETF that returns bond yield in addition to the stock index? Answer is sure ... hold a bond index plus a stock index, like XBB & XIU


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> A few ideas why everyone doesn't index, and I think #1 and #2 are the big ones ...
> 
> 3. Historically, meaning maybe before 2000, the world was a less heavily indexed place. These days markets are extremely highly correlated, globally, and very much traded via indices. The electronic markets have become increasingly indexed over time which means that different stocks and asset classes tend to now move all together, and move with the index. Non-index funds may have made more sense pre 2000 when there was less global correlation, and more opportunity (back then) to actually find an outperforming investment. Some people may remember those old days and that may keep their faith high in non-index funds...


How many of the index are genuinely new? 
Or a large part of the perceived "more indexes" that that indexes that previously were at best written up in a financial paper where now there's five or six MFs, four ETFs before considering the leveraged ETFs?

Take the newcomer S&P60 - some would say it's a new index yet if I find the paper work, I had an index linked GIC for the similar index that it replaced around 1998. 

Or I can recall reading about the Russell 2000 index a long time ago but if I use the iShares ETF creation date - I'd be thinking it's only been around since 2007.


Cheers


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> Why would the index funds do any worse than mutual funds during the 2008 crash?
> 
> Assuming the stock vs fixed income allocation is equivalent...


An active MF manager could have decided some stocks were too high and taken profits or used options to lock in profits. An index fund has no discretion.


Cheers


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## james4beach (Nov 15, 2012)

Eclectic12 said:


> An active MF manager could have decided some stocks were too high and taken profits or used options to lock in profits. An index fund has no discretion.


I'm interested in whether active mutual funds are able to do that (in practice), as it still amounts to market timing and is difficult to pull off. I would hope they can, but I'm skeptical about whether they really do.

I'll test one MF example: CIBC Monthly Income Fund. Picking on them because I like the fund (a decent balanced fund) and I have daily price data for them during the worst of the financial crisis. Surely if ever there was a time to apply their active skills, it was during the crisis. This MF is about the same thing as half XIU, half XBB

From 2008-08-12 to 2008-12-24 the MF fell -16.3% including its distribution. Question is, how much would the index equivalent have fallen?

(XIU fell -35.56% + XBB rose +1.58%) / 2 = -17.0% again including ETF distributions.

That looks too close to call. I'd have to say the index funds did about the same as this mutual fund.


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## Belguy (May 24, 2010)

Generally speaking, when constructing an 'Easy Chair' portfolio, would you just utilize the lowest-fee, broadest-based ETF's such as XIU, VTI etc. or would you bypass these in favour of some of the dividend ETF's such as XDV, DVY etc.?

If one is not employing the dividend ETF's now, would it make sense to convert one's current portfolio of broad-based ETF's into a portfolio comprised of mainly of dividend ETF's?

Does the fact that this portfolio is registered have any effect on the decision?:confused2::confused2:


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## Belguy (May 24, 2010)

andrewf said:


> Do you have any exposure to S&P 500? It's up about 10% YTD.


Yes, but it is just one component of my overall portfolio. I also invest in the TSX:frown: and precious metals:frown::upset:

If my only investment was XSP, I would be laughing but then I would not be diversified geographically either.

Here is one thought for a portfolio:

100% VTI

Period.

You could do worse. Plenty of diversification. Invests in over 3000 U.S. stocks, from small to large, through all sectors.

Cheap!! MER is a miniscule 0.05%

https://personal.vanguard.com/us/funds/snapshot?FundId=0970&FundIntExt=INT

YTD return as of April 19: +9.68%

Of course, most of us would not likely want a 100% equity portfolio and so you would have to throw some fixed income into the mix. So, if you included one bond ETF, you would have a portfolio comprising all of just two investments which would make it ultra cheap to hold and easy to manage.

If I was starting out today, I might consider this approach.

What say you?


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## andrewf (Mar 1, 2010)

That's not necessary. You just need to be less melodramatic. And not second guess your asset allocation every time you have a disappointing quarter...


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## fatcat (Nov 11, 2009)

kcowan said:


> I am an individual stock dividend investor. But Belguy has stimulated a question for you couch potato people. Are there low cost ETFs that return the dividend yield in addition to the movement of the market index (S&P et al)?


i am not certain i get your question ? ... i have always liked the dow-30 and owned DIA (and much to my distress sold it early last year) it has an mer of .17 and yields 2.27%


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## andrewf (Mar 1, 2010)

I don't understand that question. Most ETFs distribute the dividends/etc. they receive net of fees. SPY, as an example.


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## Sampson (Apr 3, 2009)

andrewf said:


> That's not necessary. You just need to be less melodramatic. And not second guess your asset allocation every time you have a disappointing quarter...


This is why I point out above that I think understanding the breakdown of a portfolio, and why investing in poorly or negatively correlated asset classes is THE MOST fundamental piece of knowledge an investor should have.

I believe most people go in with an expectation of a certain rate of return period. When this is not achieved, they believe the strategy they selected is wrong. This can obviously result in emotion-driven decisions and abandoning a strategy.

The metrics people need to look out for must be realistic .


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> I'm interested in whether active mutual funds are able to do that (in practice), as it still amounts to market timing and is difficult to pull off. I would hope they can, but I'm skeptical about whether they really do....


The potential is there as even though I had to do it around a regular jobs with meetings etc. I was able to sell AGU at a bit over $100 and then re-buy at about $50. Of course it was easier to stay with my plan as I'd left 1/4 to keep riding up, if I was wrong. 


The challenge when I've tried to confirm or refute it is that most studies what have provided enough details that I've looked at, the details show the comparison is nothing close to apples to apples. The early 2000 studies show 98% of active managers lag in the index included a slew of MFs that could only invest in a sub-index instead of the broader one being compared to. The study showing that in a broadly dropping market, active managers are able to limit the losses seemed to ignore that a significant number of those same managers were buying Nortel, which dropped much later than when the timeframe looked at.


I don't recall anyone looking at an index replacing a bunch of losing stocks with the new up & coming stocks, so that new money is rising but held money has a loss from selling the loser/incurring the costs of buying the replacement. In this respect - unless the MF bought the losing stock that's part of the index, there does not seem to be any way to have a comparison.


Cheers


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## CanadianCapitalist (Mar 31, 2009)

Belguy said:


> Here is one thought for a portfolio:
> 
> 100% VTI
> 
> ...


With all due respect, one should never, ever, ever invest this way because all you will end up doing is chasing returns. Look at the periodic table of investments to see how the top performing asset class varies from year to year.

http://www.ndir.com/cgi-bin/PeriodicTableofAnnualReturns.cgi


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## james4beach (Nov 15, 2012)

Sampson said:


> This is why I point out above that I think understanding the breakdown of a portfolio, and why investing in poorly or negatively correlated asset classes is THE MOST fundamental piece of knowledge an investor should have.
> 
> I believe most people go in with an expectation of a certain rate of return period. When this is not achieved, they believe the strategy they selected is wrong.


Very good point about the portfolio construction and correlation. Very important concept! Good luck explaining that to anyone.

I also think that some people approach the markets with the viewpoint that the market "owes" them a certain return. As if it's some kind of recipe. The reasoning goes like this ... savings accounts barely earn 2%, and that's not enough interest. I need 5% to 10% returns (and the mainstream media has convinced me this is possible) so I will buy stocks, or indexes. Ok world, here are my stocks... do your magic! I can't wait to get my 10% annual return.

Oh wait, what? The stocks went DOWN? Maybe I just need to buy more... no, that didn't do it either. Wait now I vaguely recall something about stocks declining once, it was ancient history... was it called, the Tech Crash? And then there was the Global Financial Crisis? It's all so hazy. Oh well I'm sure it's fine now, it's been at least 4 years since the last crash and the media SAYS everything is so great, and that handsome Mr. Carney says the Canadian banking system is really stable


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## MoneyGal (Apr 24, 2009)

"and all those people using fancy words like 'correlation' [nevermind 'backwardation'] are just trying to sell me complicated things I don't need! I'm going to buy Tim Horton's and McDonald's because I like donuts and fast food! And I'm going to buy lots of stock in the company I work for!"


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## Sampson (Apr 3, 2009)

I'm dying to find out whom you are quoting.


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## MoneyGal (Apr 24, 2009)

The [theoretical? imaginary?] people james4beach is quoting, many people on financial forums [over the years, no specific people or forums identified or inferred], and random people who say those kinds of things to me when they find out I work in finance.


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## MrMatt (Dec 21, 2011)

Belguy said:


> Here is one thought for a portfolio:
> 
> 100% VTI
> 
> ...


I'd consider VT and be lazier for a slightly higher MER.


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## Belguy (May 24, 2010)

CanadianCapitalist said:


> With all due respect, one should never, ever, ever invest this way because all you will end up doing is chasing returns. Look at the periodic table of investments to see how the top performing asset class varies from year to year.
> 
> http://www.ndir.com/cgi-bin/PeriodicTableofAnnualReturns.cgi


Thanks for your response and the interesting tables, CC. However, I don't quite understand what you are trying to tell me. I have often read that your portfolio should be well diversified, cheap, and easy to manage. Can't you accomplish that by simply holding one or two of the cheapest and most diversified investments such as VT or VTI? Also, how is buying and holding such an investment 'forever' tantamount to "chasing returns"?

Explain to me where this approach falls down compared with holding a portfolio of 15 to 20 or more individual stocks and then employing market timing to know which stocks to buy, when, how long to hold them, and when to sell them????

Also, is what I am proposing all that much different from the 'Classic Couch Potato' approach?:stupid::confused2:


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## longinvest (Sep 12, 2012)

Edit: Nevermind... I just saw VTI, I missed VT in Belguy's message.


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## james4beach (Nov 15, 2012)

MoneyGal said:


> The [theoretical? imaginary?] people james4beach is quoting, many people on financial forums [over the years, no specific people or forums identified or inferred], and random people who say those kinds of things to me when they find out I work in finance.


Right... I think MoneyGal and I have heard similar kinds of things over the years. I am not quoting anyone specific


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## Belguy (May 24, 2010)

Buy, hold, rebalance and prosper.:encouragement:eaceful::eagerness:


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## GoldStone (Mar 6, 2011)

*Paging OP:*

What have you learned?

Are you confused yet?

:rolleyes2:


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## Potato (Apr 3, 2009)

Eclectic12 said:


> The down sides are that:
> b) when the market in general is falling, a savvy active manager can cash in any gains, limit losses or may have already shifted into cash. The index fund drops, where selling is the only option to limit drops as the index is defining the drop.



Of course! And a savvy active manager can also select the fastest ponies when the market is good, or use concentration strategies into hot sectors to improve performance even more. And in sideways markets, a savvy manager can swing trade to beat the flat index -- an easy target!.

Now the only trick is finding a sufficiently "savvy" manager. Oh, and also how much can they beat the index by? If on average their cashing in gains and limiting losses and other activities beats the index by 1%, it doesn't do me much good if they charge 2% above an index fund for the privilege.

While the potential is there, in practice indexing should be the strategy of choice for the majority of people who don't have the skills or dedication to actively manage on their own or ferret out the minority of active managers who are able to produce returns in excess of their fees.


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## none (Jan 15, 2013)

Potato said:


> Of course! And a savvy active manager can also select the fastest ponies when the market is good, or use concentration strategies into hot sectors to improve performance even more. And in sideways markets, a savvy manager can swing trade to beat the flat index -- an easy target!.
> 
> Now the only trick is finding a sufficiently "savvy" manager. Oh, and also how much can they beat the index by? If on average their cashing in gains and limiting losses and other activities beats the index by 1%, it doesn't do me much good if they charge 2% above an index fund for the privilege.
> 
> While the potential is there, in practice indexing should be the strategy of choice for the majority of people who don't have the skills or dedication to actively manage on their own or ferret out the minority of active managers who are able to produce returns in excess of their fees.


-- and for those years where they make a couple bad calls and actually underperform the index - they STILL charge you the 2-4% fee. Yeah, screw those guys.


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## snowbeavers (Mar 19, 2013)

Belguy said:


> Yes, but it is just one component of my overall portfolio. I also invest in the TSX:frown: and precious metals:frown::upset:
> 
> If my only investment was XSP, I would be laughing but then I would not be diversified geographically either.
> 
> ...


Would probably give you the best returns but with high returns is higher risk and volatility. Most people can't deal with this volatility emotionally but if you have the stomach for it, it would provide close to a 10% return. 

See here for portfolio allocation models: https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations


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## Belguy (May 24, 2010)

Thanks for the allocation models, snowbeavers!

I have often read that getting your asset allocation correct, according to your risk tolerance and overall circumstances, and then rebalancing periodically to maintain that allocation, is much more important than what most investors focus in on which is the selection of the individual investments to include in their portfolio.

I have also read that most investors overestimate their risk tolerance and only find that out whenever the markets go into one of their swan dives, as they inevitably do, after which it can often take them many months to recover.

Many of those folks are the ones who usually end up selling in a panic at precisely the wrong time.

The moral of the story is to not try to shoot the lights out but to pick an asset allocation that you can live with through all market conditions. Also, do not put money in the stock markets in the first place that you are going to need in the next three to five years.

Remember that asset allocation and periodic rebalancing should be your most important portfolio management jobs.


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## atrp2biz (Sep 22, 2010)

Ignoring MERs, the expected value add of an active fund manager vs. an index is zero (some beat the index, some trail the index). Now let's throw in costs. If a fund with an active manager has an MER 1.5% higher than an index fund, over the course of 20 years, the value of the portfolio is only 74% of the indexed portfolio (0.985^20). That's a pretty good chunk of change. 

To overcome this cost, the active manager would have to beat the index by on average of 1.5% per year EVERY YEAR. That's a tough thing to do.


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## favelle75 (Feb 6, 2013)

atrp2biz said:


> Ignoring MERs, the expected value add of an active fund manager vs. an index is zero (some beat the index, some trail the index). Now let's throw in costs. If a fund with an active manager has an MER 1.5% higher than an index fund, over the course of 20 years, the value of the portfolio is only 74% of the indexed portfolio (0.985^20). That's a pretty good chunk of change.
> 
> To overcome this cost, the active manager would have to beat the index by on average of 1.5% per year EVERY YEAR. That's a tough thing to do.


Why would anyone ever go with an actie manager, other than laziness?


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## Squash500 (May 16, 2009)

favelle75 said:


> Why would anyone ever go with an actie manager, other than laziness?


 IMHO because 95% of investors aren't as knowledgable as the members of this forum. In other words they do what their financial advisors tell them to do. After all... these advisors do have their cottages in Muskoka to maintain--LOL.


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## bgc_fan (Apr 5, 2009)

Squash500 said:


> IMHO because 95% of investors aren't as knowledgable as the members of this forum. In other words they do what their financial advisors tell them to do. After all... these advisors do have their cottages in Muskoka to maintain--LOL.


I have to agree with this sentiment. As well, some people feel that using an adviser is a security blanket, not that they do anything if their portfolio tanks. As an example, a relative of mine in the states has an adviser for a small portfolio that has returned very little in the last few years. The portfolio is about 12 different mutual funds with a couple of hundred in a select few of them. I advised to dump the whole deal and just buy a few select ETFs and be done with it. But, she worries that she does not understand and does not have the time to take care of it. It's not like the adviser does anything to it, other than collect a yearly fee.


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## favelle75 (Feb 6, 2013)

Squash500 said:


> IMHO because 95% of investors aren't as knowledgable as the members of this forum. In other words they do what their financial advisors tell them to do. After all... these advisors do have their cottages in Muskoka to maintain--LOL.


This is completely true. I guess any sort of "service" in life can be the same thing. We pay people to mow our lawns, change our oil, fix a flat, fix a leaky faucet, repair our roofs, change out our hot water tanks, etc etc...


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## favelle75 (Feb 6, 2013)

bgc_fan said:


> I have to agree with this sentiment. As well, some people feel that using an adviser is a security blanket, not that they do anything if their portfolio tanks. As an example, a relative of mine in the states has an adviser for a small portfolio that has returned very little in the last few years. The portfolio is about 12 different mutual funds with a couple of hundred in a select few of them. I advised to dump the whole deal and just buy a few select ETFs and be done with it. But, she worries that she does not understand and does not have the time to take care of it. It's not like the adviser does anything to it, other than collect a yearly fee.


I hear that. I get most of the same with my family and close friends (although a few of them are coming around and getting quite interested). What gets me though is not that they "don't have time". Its that they won't take the time. 15 minutes (or less) and they can learn the fundamentals of ETF's and another 10 minutes they can figure out their risk tolerance and pick 2-3 f them and be done. So for 1/2 an hour of their time, it could change their future. But I guess I'm preaching to the choir here...


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## Belguy (May 24, 2010)

Some investors need an advisor to save them from themselves!! Without an advisor, some resort to market timing and inappropriate buying and selling--often at precisely the wrong times. If an advisor can save you from yourself, his or her services might just be worth it.

Note that I am not talking about mutual fund salespersons and portfolio churners here for which I have nothing good to say. 

If you use the services of an advisor at all, make sure that you use a fee-only advisor who receives no direct compensation from the investments that he or she recommends to you.

Oh, and forget altogether about bank advisors who only have you invested in their own bank's products. Self-interest personified! Those folks should consider getting a real job.


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## longinvest (Sep 12, 2012)

Belguy said:


> Note that I am not talking about mutual fund salespersons and portfolio churners here for which I have nothing good to say.





Belguy said:


> Oh, and forget altogether about bank advisors who only have you invested in their own bank's products. Self-interest personified! Those folks should consider getting a real job.


Aren't you excluding 99% of advisors? I guess that most people can't even make the difference between them.


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## Retired Peasant (Apr 22, 2013)

favelle75 said:


> This is completely true. I guess any sort of "service" in life can be the same thing. We pay people to mow our lawns, change our oil, fix a flat, fix a leaky faucet, repair our roofs, change out our hot water tanks, etc etc...


That's funny; we don't pay anyone to do any of those things.


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## Eclectic12 (Oct 20, 2010)

Potato said:


> Now the only trick is finding a sufficiently "savvy" manager. Oh, and also how much can they beat the index by? If on average their cashing in gains and limiting losses and other activities beats the index by 1%, it doesn't do me much good if they charge 2% above an index fund for the privilege...


That's where I suspect the MF manager is at a disadvantage compared to an individual. They have money flowing in from the sales front that has to be put somewhere whereas the individual for better or worse can do as they please.




Potato said:


> While the potential is there, in practice indexing should be the strategy of choice for the majority of people who don't have the skills or dedication to actively manage on their own or ferret out the minority of active managers who are able to produce returns in excess of their fees.


That's where these discussions are at times more complete than the media. After several articles about how indexing was better while the market was rising just before the tech crash, the media was reporting on how much better the MFs were limiting the losses than the indexes.

I don't recall offhand what the problem was with their methodology.


Cheers


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## Belguy (May 24, 2010)

longinvest said:


> Aren't you excluding 99% of advisors? I guess that most people can't even make the difference between them.


Better to stick with advisors of the fee-only persuasion. As far as I am concerned, the rest are mainly self-serving commission salespersons. The financial services industry is a huge business built on the backs of the individual investors.

It's YOUR money!!


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## Eclectic12 (Oct 20, 2010)

Belguy said:


> Better to stick with advisors of the fee-only persuasion.


That's where some objective numbers would help.

The fee-only advisor (% of portfolio) has my mom in a few pension funds. I question the value as it looks the same to me as reading about some investments and sitting down with someone who places the orders.

AFAICT - the main benefits are that she doesn't have to place any trades and there's some estate planning as well as other services offered for free.


There's a minimum of $250K to be considered, so unless the portfolio is annihilated - on a minimum account, he's collecting $5K or so for one meeting a year. I'd also say a few phone calls with questions but it's his assistant that does that.


Cheers


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## andrewf (Mar 1, 2010)

I don't think fee-only (of the ongoing % of AUM variety) are really much better. They all continue to charge too much for the services they provide. What we need is a la carte financial advisory solutions. 1% on a 7 figure portfolio is insane for executing a few trades and an annual meeting.


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## Eclectic12 (Oct 20, 2010)

andrewf said:


> I don't think fee-only (of the ongoing % of AUM variety) are really much better.
> 
> They all continue to charge too much for the services they provide. What we need is a la carte financial advisory solutions. 1% on a 7 figure portfolio is insane for executing a few trades and an annual meeting.


That's where as far as I can tell, it was two trades several years ago and the annual meeting. Far too little - especially as the pension fund is doing all of the buy/sell and reporting activity.


Bottom line is that there does not seem to be a style that provides assurance of good value.
Cheers


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## fatcat (Nov 11, 2009)

andrewf said:


> I don't think fee-only (of the ongoing % of AUM variety) are really much better. They all continue to charge too much for the services they provide. What we need is a la carte financial advisory solutions. 1% on a 7 figure portfolio is insane for executing a few trades and an annual meeting.


but a good advisor should do a lot more ... they can advise on tfsa and rrsp funds and monitor stocks and bonds and execute trades ... 1% is a fair figure if an advisor provides a full advice and execution service


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## Ihatetaxes (May 5, 2010)

andrewf said:


> I don't think fee-only (of the ongoing % of AUM variety) are really much better. They all continue to charge too much for the services they provide. What we need is a la carte financial advisory solutions. 1% on a 7 figure portfolio is insane for executing a few trades and an annual meeting.


Agreed. I told my wife if I die prematurely she will need to find a good advisor who charges by the hour not a percentage. Also to fire anyone who tries to sell her a mutual fund or deviate from a passive approach.


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## longinvest (Sep 12, 2012)

Belguy said:


> Better to stick with advisors of the fee-only persuasion. As far as I am concerned, the rest are mainly self-serving commission salespersons. The financial services industry is a huge business built on the backs of the individual investors.
> 
> It's YOUR money!!


I agree, Belguy, but the average person is unlikely to get to meet one. Also, the fact that they usually charge as a % of your assets doesn't seem right to me.

Me, I don't use an advisor. I read the couch potato blog and financial forums and learn from guys like you cheaply.


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## Four Pillars (Apr 5, 2009)

andrewf said:


> 1% on a 7 figure portfolio is insane for executing a few trades and an annual meeting.


Depends where the meeting is. 

I think it depends on the services - some companies will offer a heck of a lot of services for their fees ie full tax planning, estate stuff etc. As always it's up to the consumer to decide if they are getting their money's worth.

Ironically one of the best deals in investment advisor land is for a small investor who buys expensive mutual funds (even with DSC).


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## Belguy (May 24, 2010)

Well, I am managing my own mainly index portfolio but I don't have the slightest idea how to handle the fixed income component in this day and age.

If I had an advisor, what would he tell me to do with my 40 per cent allocation to fixed income?

Considering that 50 per cent of my portfolio is in equities, and equities are expected by many to remain relatively flat over the foreseeable future, and that bonds may very well be a losing proposition for the same foreseeable future, that might result in a net loss for the portfolio at just the time that I need to start withdrawing from it.

While I have managed my own portfolio for the past several years, the time may have come when I need to consult with an advisor. Such an advisor would also need to instruct me on how to set up a withdrawal plan as I enter my 70's. For example, should I convert my entire RSP portfolio to a RIF or invest part of it in an annuity?

Suddenly, I feel in need of some advice. Such wasn't so much the case when bonds were paying a decent yield and offsetting stock market losses and when all that I had to worry about was trying to make my nest egg grow. Now, life seems to be getting a little more complicated and I'm not at all certain that I should be sailing in these rougher waters on my own.

DIY may be an acceptable strategy--up to a point. However, the time may come when you need the added knowledge and expertise of a professional.

Any thoughts?

By the way, I too am turned off at the prospect of paying someone a percentage of the value of my portfolio unless I feel that I am getting something of equal or better value in return. Nobody likes to be scammed and seniors have to be more careful than most.
It's a dog eat dog world out there. Buyer beware.


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## Jungle (Feb 17, 2010)

Why not index? Because you take a huge longevity risk when withdrawing capital in bear markets? 
The 15 year CAGR of the global couch potato is an unflattering 4.77%?
Management fees of 0.20% on a 7 figure portfolio taking $2000 of your profit per year not including trading fees?
Unrecoverable withholding taxes and tracking errors on ETFS. 

No investing strategy is perfect. Some are more suitable for others. I do support couch potato and believe it's the best long term strategy _for most people_ who invest 30 + years.


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## Eclectic12 (Oct 20, 2010)

fatcat said:


> but a good advisor should do a lot more ... they can advise on tfsa and rrsp funds and monitor stocks and bonds and execute trades ... 1% is a fair figure if an advisor provides a full advice and execution service


So what do you call 2% on six figures to put into to pension fund and have the assistants answer?


At the end of the day there's lots who aren't living up to the idea of "value for service" - whether they are charging a percentage or being paid by trailer fees. 


Cheers


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## Belguy (May 24, 2010)

Eclectic12 said:


> So what do you call 2% on six figures to put into to pension fund and have the assistants answer?
> 
> 
> At the end of the day there's lots who aren't living up to the idea of "value for service" - whether they are charging a percentage or being paid by trailer fees."
> ...


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## fatcat (Nov 11, 2009)

Eclectic12 said:


> So what do you call 2% on six figures to put into to pension fund and have the assistants answer? At the end of the day there's lots who aren't living up to the idea of "value for service" - whether they are charging a percentage or being paid by trailer fees.
> Cheers


i agree completely and there is a simple solution ... find another advisor ... shop around, ask questions, get someone you like .... it's a pretty competitive industry


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## andrewf (Mar 1, 2010)

Not really. I find it really is all the same 'stuff'', just arranged in different piles.


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## Eclectic12 (Oct 20, 2010)

Belguy said:


> ... ---Buyer beware!! There are a lot of lazy advisors out there who do very little for the amount that they charge. If you find a good one who does a comprehensive financial plan for you and then follows through on the various aspects of that plan, then hold on to that advisor because he or she is a rare animal that is likely not just in the business to do as little as possible for the most financial gain.


The problem in this case is that it's not my money. So no matter what I think, there's only so far I can go suggesting alternatives and then I have to let it be.




Belguy said:


> ... All of that said, I still can't wrap my head around paying someone a percentage of the value of my portfolio year after year after year, ad nauseum.
> 
> There go the profits!!!


Again - it depends on what one is receiving. 

At the end of the day, based on what I've seen - there's lots of lazy advisors providing few genuine services for a high price, regardless of how they are paid.


Cheers


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## Eclectic12 (Oct 20, 2010)

fatcat said:


> but a good advisor should do a lot more ... they can advise on tfsa and rrsp funds and monitor stocks and bonds and execute trades ... 1% is a fair figure if an advisor provides a full advice and execution service


Problem is separating the sheep from the goats. 

Based on andrewf's comments, I suspect that he is pointing out the same thing as I am. How the advisor or whatever they are calling themselves are paid does not appear to be a reliable shortcut to better value.




fatcat said:


> i agree completely and there is a simple solution ... find another advisor ... shop around, ask questions, get someone you like .... it's a pretty competitive industry


In theory - maybe. This and other thread on CMF suggest it's not so simple. 

Where it that simple to find an advisor providing value for fee, there would be no need for the endless discussions on how to find them or advice to look for factor x to help in the process. 

And that's ignoring the number of those who prefer to DIY as "nobody cares for your money like you do" Or the recently post of " ... they STILL charge you the 2-4% fee. Yeah, screw those guys."


Regardless - since it's my mom, the best I can do is suggest. If she someday changes her mind - there's the possibility of change. Until then, it's up to her.

Cheers


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## jcgd (Oct 30, 2011)

Instead of few based compensation, I like the idea of the performance based compensation. 

Something like the advisor getting 25% of all returns above and beyond 6%. If they don't perform they get zilch. I mean, would you pay a guy to build you a house and then pay him extra when he accidentally knocks the house over and starts again?


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## jcgd (Oct 30, 2011)

There must also be some hidden risks with indexing and the couch potato and such. It's just like any other strategy, the more people that do it, the more likely it will do things we don't expect. Eventually the diversification will cause correlations to be the same, etc. 

Fortunately, we aren't expecting anything unexpected.


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## fatcat (Nov 11, 2009)

andrew and eclectic

the idea that you can't find a decent investment advisor in canada for a reasonable fee is ridiculous frankly, there are thousands of people in the profession and you say that they are all crooks ?

investing is hard work and people are happy and eager to have someone else do it for them

i use an advisor for my aunt (and the same fellow does my sister and brother in law) and he does a great job for a reasonable fee and is worth every penny

he works for an independent firm with no direct biases in pushing any given set of products unlike the investment arms of the big banks who i do think should be avoided at all costs

you guys are letting your diy bias show, we are a minority and are likely to remain so for a long time to come


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## andrewf (Mar 1, 2010)

I would have no problem with paying someone a % of AUM for a smaller portfolio, or $ per service (not % of AUM) for a larger portfolio. That way you get what you pay for, and you don't pay for what you don't use.

I'm not saying that there are no good financial advisors, but that their compensation model is nuts. It does not take 10x the time manage a $10 million portfolio vs a $1 million one, so why are they being paid twice as much for the work?

It's like paying your mechanic x% of the MSRP of your car for changing the oil, whether you have a Yaris or a high end luxury vehicle.


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## none (Jan 15, 2013)

andrewf said:


> It's like paying your mechanic x% of the MSRP of your car for changing the oil, whether you have a Yaris or a high end luxury vehicle.


I own an Audi and this is unfortunately what happens


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## blin10 (Jun 27, 2011)

if adviser is any good, he would do it himself and get rich... but for some reason they can't do it on their own, they need to work for someone, I wonder why lol


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## bgc_fan (Apr 5, 2009)

blin10 said:


> if adviser is any good, he would do it himself and get rich... but for some reason they can't do it on their own, they need to work for someone, I wonder why lol


Funny you mention that. I think that it was in The Millionaire Next Door where it was mentioned that one of the subjects kept getting cold calls from advisors. His way to deal with it was to ask the advisor to send copies of their portfolios and tax returns from the past few years to determine if they are worth using. No one ever took it up the offer.


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## jcgd (Oct 30, 2011)

Would people here be okay with their advisor not having their own moneyinvested along with your money? I wouldn't expect all of their net worth, but I'd like to see 40% or so of their net worth invested alongside me. Otherwise, why do they treat their own money differently?


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## MoneyGal (Apr 24, 2009)

jcgd said:


> Would people here be okay with their advisor not having their own money not invested along with your money? I wouldn't expect all of their net worth, but I'd like to see 40% or so of their net worth invested alongside me. Otherwise, why do they treat their own money differently?


PIC (private investment counsel) firms require this for advisors and analysts; typically your portfolio must mirror your recommendations and you cannot "trade against advice."


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## Eclectic12 (Oct 20, 2010)

fatcat said:


> andrew and eclectic
> 
> the idea that you can't find a decent investment advisor in canada for a reasonable fee is ridiculous frankly, there are thousands of people in the profession and you say that they are all crooks ?


Where did I say they couldn't be found?

All I said was that regardless of how they are paid, it's not a walk in the park finding a good one. Or do you have an explanation for for all of the posts by people regretting what they paid to their advisor/bank/MF rep ... etc.?




fatcat said:


> ... i use an advisor for my aunt (and the same fellow does my sister and brother in law) and he does a great job for a reasonable fee and is worth every penny. He works for an independent firm with no direct biases in pushing any given set of products unlike the investment arms of the big banks who i do think should be avoided at all costs.


Good for you, your aunt, sister and brother-in-law.




fatcat said:


> ... investing is hard work and people are happy and eager to have someone else do it for them ... you guys are letting your diy bias show, we are a minority and are likely to remain so for a long time to come


Maybe some of that eagerness to avoid understanding investing and have someone do everything is part of the problem.

In any case, with five relatives choosing advisors who worked for independent firms and a total of seven advisors used - there's only one that was providing value for service, IMO (Unless you believe an all GIC portfolio or 2% for two pension funds is of reasonable value). 

If you then add in all of the people sucked in by other financial institutions (i.e. banks, insurance companies), I can agree that looking for value for financial services will be a minority for a long time - DIY or not.


Cheers


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## Belguy (May 24, 2010)

For those of you who may not be familiar with it, you might want to pick up the following book at your local library: 'The Naked Investor' by John Lawrence Reynolds. 'Why Almost Everybody But You Gets Rich on Your RRSP'.

Another older book, that might be of interest, is 'The Empowered Investor' by Keith Matthews.


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## fatcat (Nov 11, 2009)

Eclectic12 said:


> Where did I say they couldn't be found?
> 
> All I said was that regardless of how they are paid, it's not a walk in the park finding a good one. Or do you have an explanation for for all of the posts by people regretting what they paid to their advisor/bank/MF rep ... etc.?
> 
> ...


well, we agree that the industry is over-priced and loaded with hucksters (and worse, it is rife with actual fraudsters partly because of parliaments refusal to dish out adequate penalties to people that steal other peoples money via investment fraud but that's another story) but good advisors do exist and if people are unwilling to take the time to find them then they deserve what they get ... at the end of the day i think 90% of all investors just look at the sum total of their monthly statement and if it appears to be moving to the northeast in a reasonable fashion they file it away happily and don't ask questions ..


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## Jungle (Feb 17, 2010)

andrewf said:


> I would have no problem with paying someone a % of AUM for a smaller portfolio, or $ per service (not % of AUM) for a larger portfolio. That way you get what you pay for, and you don't pay for what you don't use.
> 
> I'm not saying that there are no good financial advisors, but that their compensation model is nuts. It does not take 10x the time manage a $10 million portfolio vs a $1 million one, so why are they being paid twice as much for the work?
> 
> It's like paying your mechanic x% of the MSRP of your car for changing the oil, whether you have a Yaris or a high end luxury vehicle.


I feel this way about real estate sales commission too.


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## Belguy (May 24, 2010)

An advisor is one who continues to make money off of other people's money even when the latter are not making any money themselves.

You win, your advisor wins. You lose, your advisor still wins.

Nice work if you can get it!!

When it comes to fees, you should examine the long term effect that they will utimately have on the value of your nest egg. It can be truly frightening.


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## Belguy (May 24, 2010)

There seem to be no end of horror stories out there. Here is another in the never ending string:

http://www.thestar.com/business/201...million_permanently_banned_from_industry.html

So, what is the moral of the story for investors?


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## BlackThursday (Apr 25, 2011)

I would suggest anyone who wishes to debate the value of indexing and/or the damage caused by management fees to watch this PBS Frontline episode called "The Retirement Gamble".

In particular, listen to what Jack Bogle has to say. It isn't unsubstantiated opinion like so much here is. It is fact.

http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/


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## Belguy (May 24, 2010)

iShares Canada announces new ETF tools:

http://ca.ishares.com/content/strea...pr_2013_04_22_en.pdf&mimeType=application/pdf

And three new unhedged ETF's:

http://ca.ishares.com/content/strea...pr_2013_04_15_en.pdf&mimeType=application/pdf

Any opinions on these three new ETF's?

While I am not pushing iShares ETF's over their competition, here is their home page:

http://ca.ishares.com/home.htm


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## Squash500 (May 16, 2009)

Belguy said:


> There seem to be no end of horror stories out there. Here is another in the never ending string:
> 
> http://www.thestar.com/business/201...million_permanently_banned_from_industry.html
> 
> So, what is the moral of the story for investors?


 What a disaster. However from what I read...it seems that Investors Group is paying the defrauded clients back from the company coffers? That's why I personally don't trust any financial advisors...too many horror stories out there. The moral of the story for investors is to become a DIY investor if at all possible?


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## Squash500 (May 16, 2009)

Belguy said:


> iShares Canada announces new ETF tools:
> 
> http://ca.ishares.com/content/strea...pr_2013_04_22_en.pdf&mimeType=application/pdf
> 
> ...


Thanks for posting this information Belguy. I really like what ishares is doing.


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## fatcat (Nov 11, 2009)

Belguy said:


> iShares Canada announces new ETF tools:
> 
> http://ca.ishares.com/content/strea...pr_2013_04_22_en.pdf&mimeType=application/pdf
> 
> ...


the ishares appear to have lower mer's than vanguard who they appear to be aiming at 

but one difference is that vanguard holds the stocks _directly_ where ishares holds an american etf ... 

XEC holds the american etf IEMG for example ... this has tax implications for those who have them in unregistered accounts ... 

the foreign witholding tax credit *is not recoverable* in etf's that hold _other etf's_ but it *is recoverable* in etf's that hold the underlying stocks directly


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## andrewf (Mar 1, 2010)

fatcat, check the factsheet of the Vanguard funds. It seems to me they do the same thing, investing in US-domiciled ETFs tracking the same index. VEE is upt to $122 million AUM. At some point you would hope they would be able to hold these equities directly in Canada.

From a strategy perspective, what Vanguard should really do is create a 'completion' ETF in the US that holds the smallest 5 - 10% of the EAFE or EM index, and then their EAFE or EM funds in all the non-US markets could hold that portion in foreign ETF form, while the rest of the fund is invested directly (the top 90-95% by capitalization). 

I wonder what the withholding tax implications really are, though. From what I can tell, the US ETFs don't pay much withholding tax. It is quite possible that the US might have more advantageous tax treaties with 3rd party countries than Canada does, making it more efficient to hold equities from those countries through a US-domiciled ETF.


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