This week, a question from Louis-Philippe: “I would like to know why there are so many investment possibilities on the market. The choices are so numerous that you can never be sure of making an informed choice. We are constantly faced with impossible choices! I think even brokers don’t get along with each other, am I wrong? Thank you for enlightening us. »
Dear reader, your question in the form of a testimony probably resonates with me more than you can imagine. I get the same feeling when I’m shopping for a car. This transaction arouses no interest in me. Worse, it eats up precious time. Why and what to do with so many choices?
First, the facts. True, there are a lot of investments. Specifically, more than 5,000 mutual funds and 1,300 exchange-traded funds (ETFs) are available in Canada. Several different code holdings can sometimes present the same content, but in different fee versions or administrative structures. It is not always possible to invest in all of them, as some are not open to new investments, which partly explains their large number.
All of these funds can then be grouped into families: money market, fixed income, common stocks, indexes, balanced funds, specialized funds and funds of funds. Since diversification is not limited to the asset class but also to the management style, you will find in the same category funds managed according to different analysis approaches: bottom-up, top-down or technical.
In the first, it is macroeconomic analysis that leads to investment decisions, while the second will recommend choices based on business performance, regardless of the economic context. The technical approach attempts to predict future variations in security prices based on historical analysis. Finally, you will find funds managed and distributed by specialized investment companies, as well as those of banks and financial institutions.
These numerous choices should not prevent you from making an informed choice.
Tracks
To get there, you should start by establishing your level of interest in building a portfolio. If you have limited knowledge or a busy schedule, consider funds of funds or balanced funds—using your target retirement date or your risk tolerance (e.g., growth portfolio)—that are more appropriate for start investing or restricted portfolios, but which allow you to build an interesting base. You will have fewer choices of funds to make to start and you will be able, with experience, to integrate additional funds later.
There are many online resources that can help guide your choices, the best known being Morningstar in Canada. You can compare funds with their peers (return-risk relationship, composition, management fees, etc.). It is also possible to compare the performance of active management funds with their benchmark index.
This makes it quite simple to eliminate a large portion of the funds offered, focusing on the best in each category. Why bet on a fund that ranks last? There’s no harm in choosing safe bets and saving yourself some headaches. You will be able to breathe more lightly by prioritizing funds that are held in the 1er or 2e quartile. Obviously, this research requires effort.
Furthermore, before purchasing a fund, whether by managing your investment independently or by being advised by a professional, you should at least read the regulatory fund overview and the simplified prospectus, which present the essential elements to know before investing. The more funds you integrate into your portfolio, the more important the analysis of correlations between the funds selected will be in order to prevent your diversification from becoming scattered. When you entrust the management of your portfolio to a broker or a representative, this is partly what justifies their fees.
More consensus among brokers than you think
It is obvious that certain professionals affiliated with a financial institution or a banner may be inclined to distribute certain funds more than others. For example, banks distribute their own fund families and it is normal for their employees to promote them. However, independent advice still exists on the market and I would even say that it is increasingly sought after by investors.
The brokerage formula makes it possible to build a more efficient portfolio by using the best funds offered by different investment companies, by effectively combining active and passive management and by integrating strategic advice regarding taxation or disbursement of the portfolio. Having analyzed hundreds of portfolios, I would hypothesize that there is consensus on certain funds that perform well in their category or asset class.
Unfortunately, it’s easy to get bogged down in a sea of numbers and portfolio comparisons to the point where you question some points in just about every portfolio. This is perhaps what makes our reader feel that the brokers are not getting along; Those who want to win over a new customer often tend to question the choices previously made by others.
The real conclusion, anyway, is that a perfect portfolio… does not exist! The important thing is to understand the investment policy that led to its construction, so that it meets the objectives and risk tolerance of its owner. You will then need to ensure that you or your advisor take into account traditional diversification between stocks and bonds and that you choose funds with a complementarity approach. Once the choices have been made, you will need to be patient and resist the temptation, if you are an independent investor, to make too frequent changes. Of course, this work will require significant research efforts. In the absence of interest or time, do not persist: delegate to a professional.