The world of investing is strange.
This is the only field where people who know absolutely nothing about it have the opportunity to match, or even surpass, the results of experts who occupy some of the most prestigious positions in our society.
In what other area is this possible? The first passerby would be unable to perform open heart surgery in Sainte-Justine. Or directing the Montreal Symphony Orchestra. Or sink a long putt like Tiger Woods.
In investing, it’s not only possible, it’s common.
That’s what came to mind the other day when the Caisse de dépôt et placement du Québec, one of the world’s largest institutional investors, released its performance for last year.
In 2023, the Fund had a return of 7.2%.
The comparison is not perfect. But a diversified portfolio of index funds 60% stocks, 40% bonds (the “steak, corn, potatoes” of investments) achieved a return of 12.5% in 2023, including reinvestment of dividends.
And for five years? We have still experienced a lot of flat business since the end of 2018. Since that date, the Fund has obtained an annualized return of 6.4% with its assets distributed in nearly 70 countries around the world. A 60/40 portfolio grew 6.85% during this period.
What about the very long term return? Since its creation in 1965 during the Quiet Revolution, the Fund has obtained an annualized return of 8.2% on average.
Comparisons are even more difficult when we go back in time. But we know that a portfolio composed of 50% Canadian stocks and 50% American stocks has historically experienced an average growth of 10.9% from 1919 to 2019, according to calculations by Elaine Loo, investment advisor. partner in the Stan Clark financial team at CIBC Wood Gundy. Canadian bonds experienced an average annual return of 4.9% during this 100-year period.
Visit Stan Clark’s website
This therefore gives us an average growth of 8.5% per year in the very long term for a 60/40 portfolio during a period which includes the crash of 1929, the Great Depression and the Second World War, in particular. This is a hair above the performance of the Fund since its creation.
Assembling a portfolio of hundreds of stocks and bonds would have been difficult and expensive in the last century. We can do it in seconds today, for zero transaction costs.
I am not trying to criticize the Caisse de dépôt, which must deal with all kinds of requirements and restrictions.
But there is a myth in finance that great managers have a “secret sauce”, a “magic touch” to multiply dollars and obtain sparkling returns that ordinary mortals do not have access to.
The data shows us that this is not the case.
Charlie Munger is less nice than me. The late American billionaire investor said last year that big managers were “overestimating their abilities” to create more wealth than the market on a risk-adjusted basis for their clients.
“How many managers will beat the indices, all fees combined? Mr. Munger asked. Maybe 5% of them regularly beat the averages; everyone else lives in a state of extreme denial. »
Either way, here’s how to beat the Depository in three easy steps.
First, I use the word “simple,” not the word “easy.” Investing, even when done well, is never “easy”. Experiencing several years of declines in a row is not “easy”. If you believe that investing is easy, or even exciting, it is because the markets have not yet seen to your education; have no fear, your turn will come.
Then, all the data we have tells us about the past. The world of investment is like that: we always move forward in the fog. The best we can do is diversify our investments, establish the level of risk we are comfortable with, and let our assets work in peace for as long as possible.
Now that that’s said, the three steps are:
1) Open a brokerage account
All Canadian financial institutions offer brokerage accounts. You can open an RRSP, TFSA, CELIAPP, RESP brokerage account, or a non-registered account, that is to say without special tax treatment. Most institutions charge a management fee of $100 per year if you don’t have $15,000 or $20,000 invested. If you are starting with little money, know that platforms like Questrade or Wealthsimple do not have management fees, regardless of the amounts invested. Desjardins (Disnat) drops fees for investors aged 18 to 30.
2) Buy a diversified and balanced fund
Assembling a diversified portfolio by purchasing a single fund has been simple since the arrival of all-in-one index exchange-traded funds (ETFs) in Canada around 15 years ago. For example, the Vanguard Balanced ETF Portfolio (VBAL) fund is composed of 60% stocks of nearly 14,000 companies in 51 countries, and 40% bonds. All this in a fund with a total annual management fee of 0.24%. Blackrock offers a similar fund under the symbol XBAL, and BMO under the symbol ZBAL.
Versions of these funds also incorporate 20% bonds instead of 40%, which could give them more long-term growth potential, but also more volatility. These are the VGRO, XGRO, and ZGRO funds.
For very large portfolios, it is possible to purchase individual ETFs (Canadian stocks, US stocks, international stocks, etc.) and save even more in management fees. For most people, all-in-one funds are hard to beat, since they require no monitoring or intervention on our part.
Buying or selling a unit of a fund usually costs $9.95, regardless of the transaction amount. But downward pressure is underway in the industry. Desjardins (Disnat), National Bank Direct Brokerage and Wealthsimple do not charge commission fees on stocks and ETFs.
3) Sit on your behind
This is the most difficult step. This is not a joke. The best investors are those who do not intervene in their investments. They regularly add money, and that’s it. If you can’t help but invest based on what François Trahan says, or if you’re thinking of doing like your brother-in-law and investing your retirement in Nvidia, don’t invest on your own. Instead, work with a financial advisor.
Is self-directed index investing for everyone? No. Is it ideal for certain people? Absolutely.
You don’t need to occupy a corner office at the top of a glass tower to make it happen.
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