Are the professionals who look after our investments capable of beating the market? Is it time to buy GICs? Is it a good idea to say goodbye to your mutual funds after a drop? These are the topics of some of the questions received by email this week.
Let’s start with Jonathan, who isn’t happy about paying high annual fees on his investments. He discussed it with his financial adviser, who pulled out all the stops by promising him exciting returns.
“My financial adviser tells me that when I pay around 2-2.5% in fees on my investments (which includes advice plus fees in each investment), if he manages to get 1% more net of fees as the clue, I’m winning. I would like your opinion on this statement, especially since you often talk about the erosion of investments because of fees! »
I have a question for your financial adviser: if I manage to get more goals than Alphonso Davies, will I play for the Canadian team at the next World Cup? In other words, your financial advisor is selling you dreams (to put it mildly). If you pay a fee of 2.5% and he wants to beat the market by 1%, that means he has to outperform the market by 3.5% on a continuous basis, year after year. year after year, to serve you well.
The reality is that pros generally fail to beat or even match market returns.
According to the most recent SPIVA Canada analysis by S&P Global, more than 80% of Canadian mutual funds have underperformed their category index over a 3-, 5- and 10-year horizon. For funds that invest in the US market, it’s worse: more than 90% did less well over these three periods. As a client, we are often presented with funds that have beaten the market in recent years, telling us that they are good investments. However, a fund that has done well in the past will not necessarily perform well in the future. This explains why, according to S&P Global, the survival rate of mutual funds in Canada over 10 years is 47%: more than half of the funds are closed, and their assets liquidated or merged with those of other funds.
If your financial advisor can’t put your money in a balanced, diversified portfolio of index exchange-traded funds (ETFs) with low management fees, pick up your ball and find someone who can.
Gilles has a question about the bonds in the portfolio.
“In my investment portfolio, I’m comfortable keeping only 20% in bonds for now. I consider bond ETFs, but when you can have 5% GICs for 1, 3 and 5 years, I would rather tend to favor the latter. I therefore think of dividing the sum into three and distributing it over each of these deadlines. Could that be a good strategy? Should I Consider Bond ETFs? »
As their name suggests, Guaranteed Investment Certificates (GICs) are secure investments that promise us a set amount when they mature. In recent years, the interest paid was not very high, but that changed with the rise in rates. The limitation of GICs is that our money is unavailable until maturity. To regain some flexibility, some investors ladder GICs so that a portion of their investment matures each year. They can then use the money, or reinvest it by buying more GICs at that time, but it takes some vigilance not to let things drag on. Bond ETFs, on the other hand, are highly liquid and can be sold in seconds. The two avenues you are considering offer good protection for the “stable” part of your portfolio, the trick is to choose the one that suits you best.
Finally, Nicolas is faced with a dilemma: he wants to start managing his portfolio himself, but, after months of falling stock markets, he wonders if the moment is right for making the transition.
“I would like to put my savings in two index ETFs (stocks and bonds) and manage them myself, but that means selling my current portfolio when it’s down and missing the rally. Doing what you explain necessarily involves breaking one of your rules: do nothing and let your money work. »
Whether you own a basket of stocks or mutual funds, your current portfolio is based on active management. As I explained above, almost all actively managed investments underperform the market as a whole.
So the idea of waiting for the value of your portfolio to rebound may be a mirage, since many stocks and equity mutual funds will never return to their previous highs.
Also, the market is down this year (-18% in the US, -6% in Canada), so selling down assets to buy down assets is not illogical, especially if they are held in tax-protected accounts, such as an RRSP or TFSA.
A word on self-managing the portfolio: you’ll pay less in fees, but make sure you incorporate the right investing behaviors, like not selling in a storm, panicking in anticipation of a drop, etc. Otherwise, you’ll just replace one problem with another and hurt your long-term performance.
No investor has a perfect background. The idea is to build the best possible portfolio as soon as we can, and then build it throughout our career and ignore the ups and downs of the market.