# If port. manag. can�t reliably beat the benchmark, why not simply buy the benchmark?



## none (Jan 15, 2013)

*If port. manag. can’t reliably beat the benchmark, why not simply buy the benchmark?*

Nice article on canadian couch potato.

I really wish mine was doing better - equities doing great, my bonds and REITs are getting slaughtered. Oh well, I guess I'm about 2.25% ahead over where i would be if I was in a managed fun. I need to keep reminding myself that.

http://canadiancouchpotato.com/2013/11/11/worst-mutual-fund-ad-of-the-year/#comments


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## My Own Advisor (Sep 24, 2012)

Great post. Just left a comment. I think it will be hard to give up my CDN and U.S. stocks though. I need to really benchmark everything in my portfolio and see where things are at. That's a goal of mine for 2014.

YTD, I think I'm up about 11% so close to XIU which is comparable for me.


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## none (Jan 15, 2013)

MOA: I'm not sure if benchmarking would really provide you with much information really if you believe that past performance is not indicative of future returns...

Basically for me I believe in the theory of index investing so regardless of what it's doing I'm convinced I'll likely do better over the long term than doing anything else (of course a single lucky stock pick would change that (assuming no bad stock picks).

Anyway, I thought it was a good article. I'm surprised at how hard it has been to get my friends away from active management to couch potato. It didn't take that long to convince me and I'm usually the skeptical one.


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## GoldStone (Mar 6, 2011)

My Own Advisor said:


> I think it will be hard to give up my CDN and U.S. stocks though.


Apples and oranges. The mutual fund in the CCP article charges 2.77%. And that's just the MER. Trading costs are extra. You don't have the same hurdle to overcome.


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## dubmac (Jan 9, 2011)

I like this site - it calculates how much $ is taken by fees when one invests in mutual funds over time. Quite sobering.

http://saviifinancial.com/seg-funds/m-e-r-fee-calculator/


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## gibor365 (Apr 1, 2011)

good calculator....applicable also foe ETFs... 100K in CDZ with 5% anual growth and 10 years of holding = 10533.29 of Lost Earnings: (impact of MER fee on investment measured by the loss of potential earnings.). This is why imho better to hold individual stock instead of some ETFs... obviousle it's not applicable for ETF like VTI, SPY or VXUS


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## andrewf (Mar 1, 2010)

All it shows is that there are some pricey ETFs out there.


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## gibor365 (Apr 1, 2011)

andrewf said:


> All it shows is that there are some pricey ETFs out there.


It shows that bigger portfolio - more you lose on MER, more your time period - more you lose.
Even with pretty low XIU MER 0.17 with portfolio of $500,000 and just 5% ROR -> in 10 years your Lost Earnings: (impact of MER fee on investment measured by the loss of potential earnings.) $13,282 and in 20 years - $43,625


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## andrewf (Mar 1, 2010)

But it would cost an individual a fair amount to replicate XIU. Even with a modest valuation applied to your time, it's likely that you would save money by holding XIU rather than trying to replicate yourself.

There's a reason why giant institutional investors use ETFs. If they think it makes sense at the scale of tens or hundreds of millions of $, I'd say it makes sense for people with accounts in the couple hundred k$ range.


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## blin10 (Jun 27, 2011)

why would I want to replicate it ? I rather pick out cream of the crop and stick with that while saving $ on mer



andrewf said:


> But it would cost an individual a fair amount to replicate XIU. Even with a modest valuation applied to your time, it's likely that you would save money by holding XIU rather than trying to replicate yourself.
> 
> There's a reason why giant institutional investors use ETFs. If they think it makes sense at the scale of tens or hundreds of millions of $, I'd say it makes sense for people with accounts in the couple hundred k$ range.


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## andrewf (Mar 1, 2010)

Diversification?

Also, the evidence that stock selection (beyond factor tilts) does not reliably generate alpha? Today's cream is tomorrow's rancid milk.


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## gibor365 (Apr 1, 2011)

from my example amoutn you lose equal almost 2,000 trades per year! 
Some giant institutional investors use ETFs, others don't... all depends.... institutions also hire 3rd party compnaies to paint their walls and clean their floors, but majority of individuals doing it by themselves....
Again, all depends on ETF, i agree if you are talking about those with many hundreds or thousands of holdings like VXUS or VEA or VTI, but to have exposure to financials and buy ZEB - doesn't worth it ... regarding XIU.... doing some simple research every one can have own "enhanced" XIU, for example remove from 60 stocks those who has too high P/E, payout, P/B, very low yield etc, you will have less than 60 stocks, but there is a good chance that it will outperform XIU...(good example - you wouldn't hold YLO like XIU did)
I simulated such approach for CDZ and last time I was checking this "mini ETF" outperformed CDZ by much...


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

That is a hell of a good question. In recent years hedge funds have been dropping like flies and very few beat the bench marks. It came out a while back that when they were doing well it was thanks to "expert networks" in other words trading on inside information or, cheating. Now that door is closed they are mostly losing money.

Years ago I read where 86% of mutual funds fail to beat the averages (Dow Jones or S&P). I also noticed, when you see a list of the best most profitable mutual funds you never see the same names 2 years running. In other words if you go looking for the above average fund you are basically looking for a kid with hot dice.

There are a few legendary investors like Sir John Templeton, Peter Lynch and Warren Buffet who made 10%, 12% or more average over 20 years but how do you know in advance which one to pick? 14 out of 100 are above average. 86 out of 100 are average or below average.

Buffet himself summed it up like this:

Q: How do you make money investing?

A: Learn value investing, spend hours every week combing through annual reports looking for bargains

Q: What if you don't have the time, talent or inclination to do that"

A: Index everything.

It has been common knowledge for years that the average manager or mutual fund does worse than the broad stock market average. This is where the idea for market funds or ETFs that mimic the S&P came from. Buy the averages, cut expenses to the bone and you will beat most of the hot shot managers at their own game.


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## blin10 (Jun 27, 2011)

i rather diversify less with solid names then over diversify with a ton of garbage companies.... if Today's cream is tomorrow's rancid milk then what's today's rancid milk tomorrow ?



andrewf said:


> Diversification?
> 
> Also, the evidence that stock selection (beyond factor tilts) does not reliably generate alpha? Today's cream is tomorrow's rancid milk.


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

The article linked to is an absolute classic of the mutual fund industry. Here is how you make money in mutual funds: You don't buy them, you sell them.

Step one: Start 10 funds. Let some invest in stocks, some in bonds, some Canadian, some foreign, who cares.

Step two: After a year or 2, by the law of averages 2 or 3 will be doing great. 2 or 3 will be giant suck holes. The rest will be in the middle.

Step three: Take the dogs out behind the barn and shoot them. Redistribute the assets to the lucky ones.

Step four: You now have a stable of 3 or 4 funds, all above average in performance. Sell the hell out of them using weaselly ads like the one linked above. 

Step five: Take your new found millions and invest in whatever. Cream off 80% or 90% of the profits in fees and expenses. Hope the market doesn't do anything radical and the suckers' accounts stay about even.

Step six: When the market blows up and the suckers get wise shut down the whole show and start over. There is always something new to sell. If not mutual funds, income trusts. If not income trusts, bond funds. If you are a big brokerage or investment company this is where the real money is. Forget about touting stocks, that went out with wide ties and Hai Karate. Since they deregulated the brokerage business, the real money is in packaging up some kind of fancy investment vehicle and peddling it to the suckers. Doesn't matter what kind of vehicle as long as you can flog it to the marks.


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

blin10 said:


> i rather diversify less with solid names then over diversify with a ton of garbage companies.... if Today's cream is tomorrow's rancid milk then what's today's rancid milk tomorrow ?


Yoghurt?


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## blin10 (Jun 27, 2011)

Rusty O'Toole said:


> Yoghurt?


lol :>


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## humble_pie (Jun 7, 2009)

cream never becomes milk, fresh or otherwise

today's cream is tomorrow's delicious crème fraiche, if the cook goes at right
a staple of cordon bleu.


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## gibor365 (Apr 1, 2011)

andrewf said:


> Diversification?


you will have very limited diversification by holding any Canadian index ETF: XIU or XIC


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## humble_pie (Jun 7, 2009)

that's right, no diversification with XIC, only something like the toronto 300, it's a shame


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## Vitalogy80 (Apr 12, 2009)

humble_pie said:


> that's right, no diversification with XIC, only something like the toronto 300, it's a shame


Yep, but how much of XIC is in the Finance and Oil/Gas industries? You might be diversified in companies, but if you're investing in the TSX it's almost all Finance and Oil/Gas companies. Any downturn in those industries and you're in trouble


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## gibor365 (Apr 1, 2011)

Vitalogy80 said:


> Yep, but how much of XIC is in the Finance and Oil/Gas industries? You might be diversified in companies, but if you're investing in the TSX it's almost all Finance and Oil/Gas companies. Any downturn in those industries and you're in trouble


That what I meant! Add gold stocks and you'll get 70% of XIC in just 3 sectors... In comparisson VTI has less than 30% allocation for those 3 sectors


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## humble_pie (Jun 7, 2009)

i've never owned XIC - has no options to speak of, therefore not a candidate - but i thought all holdings were capped?

XIU would be more sector weighted. Last time we compared - some time ago - XIU was ahead. This time - without checking - i'd say XIU is definitely ahead due to its overweighting in bank stocks.

finance & resources *are* the canadian economy. What could VTI be holding in its 70% allocation that's said to be outside the principal sectors? i mean, there's shoppers drugs, a few grocery chains, telcos, a tiny heat map around waterloo ontario, a bunch of ragtag individual stocks that cmf likes to chirp about under Individual Equities ... not much more


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## gibor365 (Apr 1, 2011)

btw, XUI has exactly 70% (like XIC) exposure to those 3 sectors 
I don't tell that XIU is bad, but imho shouldn't be the only equity for Canadian market...

_finance & resources *are* the canadian economy_ yeah, yeah....Canada is more and more turning to be "banana republic"  just our "bananas" are oil and gold


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## P_I (Dec 2, 2011)

Vitalogy80 said:


> Yep, but how much of XIC is in the Finance and Oil/Gas industries? You might be diversified in companies, but if you're investing in the TSX it's almost all Finance and Oil/Gas companies. Any downturn in those industries and you're in trouble


You can always check sector weightings for yourself, see XIC - S&P/TSX Capped Composite Index Fund as of 12-Nov-2013:
• Financials 35.30%, 
• Energy 23.24% 
• Materials 12.25%
Total in three sectors is 70.79%.

For comparison, XIU - S&P/TSX 60 Index Fund as of 12-Nov-2013:
• Financials 37.75%
• Energy 22.51%
• Materials 11.39%
Total in three sectors is 71.65%.

A Canadian investor who allocates their equity holdings between either XIC or XIU and VTI (and perhaps VEA) can offset the concentrated sector weightings in Canadian market capitalization weighted indices. It is left as an exercise for the reader to play around with XIC:VTI splits to gain a suitably diverse section allocation to meet their objectives and risk tolerance.


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## Jungle (Feb 17, 2010)

It seems the tsx is not hard to match or beat with stock picking. Add a few a large cap bank, telco, railway, pipeline, oil, etc. And it matches pretty close. but I would not say the same for anything else, such as the usa market. This is just my oberservation and experience only.


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## doctrine (Sep 30, 2011)

I think it would be much harder to beat the S&P 500 than the TSX. The TSX is also very heavily cap weighted, i.e. although it's supposedly ~250-300 stocks, the top 10 make up 35% and the top 20 make up 50%, so there's not really a big difference between the TSX 60 and TSX Composite. 

If there was an equal weight TSX Composite index, it might be harder to beat, although I suspect the diversification issue would be the same.

The Globe ran a theoretical stock selection based on an equal weight portfolio of the largest 2 in each sector (i.e. 2 x 10 = 20) companies, and the gains were quite substantial over the TSX with much better diversification. I prefer strategies like that than just loading up on banks and energy companies and hoping they do well (banks, yes; energy, not so much).


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## My Own Advisor (Sep 24, 2012)

@none, you're probably right.

@GoldStone, fair point. 

@andrewf, I think you could replicate XIU, but you're right, it would cost a good $200,000 or so.

Fees on XIU per year on $200,000 are pretty cheap, so I do both; individual stocks and some indexing.


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## My Own Advisor (Sep 24, 2012)

@doctrine, I hear you. You own the CDN banks, and leading companies in XEG and XUT and right there, not much difference in XIU. The challenge is, having the portfolio value to buy those companies individually, get them DRIPping and waiting for modest prices to buy them. Based on my experience, tough to do on both fronts.

Where is that Globe are article you speak of? "The Globe ran a theoretical stock selection based on an equal weight portfolio of the largest 2 in each sector (i.e. 2 x 10 = 20) companies, and the gains were quite substantial over the TSX with much better diversification."

Mark


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## P_I (Dec 2, 2011)

My Own Advisor said:


> Where is that Globe are article you speak of? "The Globe ran a theoretical stock selection based on an equal weight portfolio of the largest 2 in each sector (i.e. 2 x 10 = 20) companies, and the gains were quite substantial over the TSX with much better diversification."
> 
> Mark


I believe the reference is to Rob Carrick's article Got two minutes? You can beat the market - The Globe and Mail


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