Money and happiness | How I beat 95% of the pros in the stock market by being 100% lazy

In Money and happiness, our journalist Nicolas Bérubé offers his thoughts on enrichment every Sunday. His texts are sent as a newsletter the next day.

I often talk about long-term investment returns here, and I use the number 7%. A reader considers it “unattainable”.

“Who can expect 7% annual returns? she writes. My mother has been investing in her RRSP since her twenties. She always dealt with a professional, she was sometimes poorly advised. Today, at 60, she tells me that reaching 6% remains a dream. What can we do to stop hoping and make our money grow? »

First of all, kudos to your mother for investing for the majority of her adult life. It’s a win, regardless of the returns.

Then, there is a myth that to be successful in the stock market, you must: 1) pursue a career in finance; 2) enjoy reading quarterly reports; 3) get up at 4 a.m. and have your first coffee in front of eight screens to follow the European and Asian markets while analyzing the alpha, beta and Sharpe ratios of your investments.

I don’t work in finance. I don’t read quarterly reports. And I will only get up at 4 a.m. under threat (and then again). However, my long-term performance is better than that of 95% of professional investors.

How is it possible ?

This is because I learned to 1) sit back and let the market work for me; 2) pay very little fees.

Let’s go with concrete data.

A diversified portfolio composed of Canadian, American and international stocks has produced an average return of 9% per year for 50 years, according to backtesting by Justin Bender of PWL Capital^⁠1. That’s the past. The rear view mirror. We don’t know the future, but almost all analysts expect that stocks will continue to be the best investment vehicle for years to come.

The problem with stocks is that they experience terrifying episodes: falls of 10 to 50% are inevitable. This is why a balanced portfolio also contains another asset class: bonds.

Bonds – essentially money you lend to a government or company – have lower yields than stocks, but tend to stabilize our portfolio.

The easiest way to acquire stocks and bonds is through index exchange-traded funds (ETFs). Sold by firms like BMO, Vanguard or BlackRock, in particular, these funds contain shares of all the companies on a stock market in a given country. Bond ETFs complete the picture.

To generalize – you should talk to a financial planner to get the facts straight – young investors, who have decades ahead of them, can have a “growth” portfolio made up of 80% stocks and 20% bonds. . People in mid-term or retired can aim for a “balanced” portfolio of 60% stocks, 40% bonds.

All-in-one index funds that contain thousands of Canadian, U.S. and international stocks, as well as bonds, had returns of 8.75% for the “growth” formula and 8.46% for the formula “balanced” per year on average for 50 years, according to Mr. Bender’s retroactive tests. These returns include fund management fees, which are 0.24% per year, but do not include the fees of a professional who would manage our investments. I gave in this text² the name of several popular funds.

If you deal with a professional, there is a good chance that they will offer you mutual funds instead.

Unlike index ETFs, which contain all the companies in a given market, mutual funds are assembled by a manager, who attempts to include the “good” companies, and exclude the “bad” ones in order to improve the returns or stability of the fund.

Do some mutual funds beat the market? Of course: if a firm offers dozens of funds, there are always a few that have had an excellent period recently. It is often these “first in class” who are then presented as a priority to customers.

Unfortunately, research shows us that a fund that has done well in one period often performs worse in the next period. And so identifying a fund or manager that “beat” the market for decades is only obvious in hindsight.

As I wrote earlier, 95% of mutual fund managers underperform their benchmark over the long term on a risk-adjusted basis, that is, for both dynamic and conservative funds, according to the S&P Indices Versus Active Funds (SPIVA) analysis^⁠3 published twice a year since 2002.

Mutual funds also come with management fees four to five times higher than those of an index ETF, often around 1% per year. This is in addition to the fees charged by the professional who takes care of our investments.

The investor must therefore say goodbye to 1.75%, or even 2%, of the size of his investments each year. Whether investments are up or down doesn’t change anything. Performances come and go; the charges are forever.

In summary: a diversified and balanced index portfolio has offered annual returns in excess of 6% for decades. But for all sorts of reasons, few investors have captured this growth.

How to improve your yields? One option is to maintain a portfolio of index ETFs yourself in your online brokerage account. That’s what I do. My investing philosophy is simple: I’m 100% lazy. No matter the state of the markets, no matter what experts predict, I never sell anything in my portfolio. This strategy takes me zero minutes per year to execute.

Learning how to invest correctly is one of the most profitable gifts you can give yourself. I save thousands of dollars a year by avoiding the high fees and chronic underperformance of mutual funds – dollars that will continue to work in my account and multiply for decades.

That said, managing your own investments is not for everyone. Bad investor behavior (selling in a fall, switching from one fund to another, investing too little, etc.) can quickly cost us much, much more than doing business with a professional, regardless of the fees. .

For a long time, investors therefore found themselves in an impasse.

But not anymore.

This is because, since 2022, we can continue to do business with a professional while investing in index mutual funds with extremely low management fees. In short, the best of both worlds.

These new index mutual funds are marketed by RBC and TD, but all collective savings representatives have access to them. Here are the mutual funds (Series F) in question:

These funds can be used to build all types of portfolios, ranging from aggressive to conservative. And even by subtracting approximately 1% in annual fees for the advisor with whom we do business, we arrive at total fees lower than what has been the norm in the country until now. Over very long periods of time, saving 0.50% or 0.75% per year in fees can mean tens of thousands of dollars, or more, in our pockets.

Will the markets continue to offer us generous returns in the long term? No idea. No one controls the direction of the markets.

What we do control, however, is our behavior and the fees we pay. Our task is to realize this. And let the market do the rest.