Saving A Fortune for Canadians: Part 1 of 5
How about giving the value of your stock market assets a boost by a further 1.9% per year? Over 25 years, that’s boosting your returns by 60% over what they would otherwise get. Welcome to the first of a five-part series on how Canadians can save a fortune.
Nearly all of us have some exposure to the stock market, even if it’s only through an employer pension plan or an RRSP. Our hard-earned money is typically invested in ‘actively managed’ funds, which, as the name hints are funds managed by teams of analysts and managers – who decide what shares to buy, sell or hold. And for their energy and expertise, they charge higher fees – to support some of the highest salaries and bonuses of any profession in the world.
In Canada, for funds investing in shares, we pay about 1.9% to 2.0% per year, which is steep compared to fees in other countries. As a warning – the fees are often hidden so, as you might with ‘healthy foods’, you will unfortunately dig beyond the marketing headline. Now, if these fund managers were generating returns above what a monkey could get for you, the fees wouldn’t be a problem. That pivotal “if” has been the bane in many an eye. Time to invite some independent investment authorities:
“In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons.”
“Empirical evidence shows that active funds underperform indexes by about 75 basis points.”
“On average, most managers fail to beat most of the indices most of the time.”
In one study, amongst hundreds, Dimensional Fund Advisors found that only 17% of actively managed equity funds beat their benchmarks after 15 years. And in the rare cases, where the fund manager does beat the index, most of that out-performance is often eaten by the fund manager’s fees and costs. I forgot to mention that passive, index-linked funds cost typically 0.1% per year – a fee that supports the basic operations and administration of the fund.
Any massive industry, such as fund management, is going to find nuances and “ifs and buts” to defend itself – after all, there is the next Ferrari to pay for. The independent and academic research has however been consistently damning against actively managed funds. I’ve been lied to by a bank’s Financial Advisor in Toronto who insisted that index-linked funds didn’t outperform actively-managed ones. That in itself is worth flagging – don’t expect your Financial Advisor to be honest on this – they or their employers are incentivised to sell you higher-fee products.
But the reality is that Canadians are better off investing our RRSPs, TSFAs and RESPS et al in index-linked funds. One such example is the Toronto Stock Exchange which has within it some 250 listed companies. Passively managed or ‘index-linked’ funds outperform actively managed funds, and cost a tiny fraction of what actively managed funds hit us with.
It’s little wonder then that the very first recommendation by a Harvard Business School article titled, “How To Improve Your Odds of Success at Investing” was “Reduce your reliance on these poor odds by using low-cost, low-turnover solutions—preferably index-like mutual funds with a relatively low focus on active management.”
Ladies and gentlemen, welcome to your new best friend …… “index-linked”