Here’s my latest MoneySense blog, which bears the headline When dividend investing trumps a balanced portfolio.
That’s an accurate depiction of the content but here at the Hub we’re sticking with the more offbeat headline used above. Because this column really does begin with a true story about harness racing in Florida.
How can that possibly relate to asset allocation and dividend investing? Click the above link to find out, or the Hub’s version below. And yes, the happy winner depicted below clutching a winning ticket is my wife, Ruth Snowden.
She’s known in her industry by that name. When we got married more than a quarter century ago she was concerned I might take offence that she didn’t want to use my surname in business circles. My response won’t surprise those who know us: “Honey, you can call yourself whatever you want as long as you pay half the mortgage!”. Of course, the mortgage has long been paid off, consistent with the Hub’s philosophy that “the foundation of Financial Independence is a paid-for home.” Read more
By Jonathan Chevreau
After Robb revealed his “conversion” and I appealed for other readers with similar stories, readers started to come out of the woodwork. In one of the cases, the “confession” appeared first at MoneySense and now here and the Hub.
In addition to the two readers profiled in the MoneySense blog, I’ve already started to receive more emails from other “pure” readers. Please let me know by emailing me at email@example.com. Hopefully, we’ll discover that there are a lot more than the half dozen I’m so far aware of.
I’ve republished the original version of the blog below and included photographs of the two readers that were not included in the MoneySense version:
Pure indexers step forward
Early in January, popular blogger and fee-only financial planner Robb Engen announced on Twitter and his Boomer & Echo site that he had finally bitten the bullet – he’d liquidated his portfolio of individual dividend-paying stocks in order to become a 100% “pure” indexer.
As he subsequently revealed in a blog at the Financial Independence Hub, he “felt like a part of me died,” but nevertheless manned up and sold off his 24 stocks, $100,000 worth of them. He replaced them with just two Vanguard ETFs that happen to be MoneySense ETF All-stars: the All World ex-Canada ETF (VXC) and Canada All Cap Index ETF (VCN) and “that’s it.”
Click on the link for the full story but the rest of this blog is about two young investors who responded to my request for similar dramatic Damascene conversions. It had seemed to me that Robb’s heroic conversion was unique although the pages of MoneySense’s magazine and books have occasionally been graced by a similar tale from Millionaire Teacher Andrew Hallam.
Embracing the Global Couch Potato
Jason St. Hilaire (@TcommeFinance on Twitter) is 31 and lives in Quebec City. The medical physicist started to invest seriously in December of 2011, when he put the ING Direct Balanced Fund in his TFSA and ING Growth Equity Fund in his RRSP. His early research made the case for index investing, so he put four TD e-Series funds in his TFSA (the Global Couch Potato portfolio).
“At some point I even bought some Bitcoins. You can see that I was all over the place.” Then, like Robb Engen before his dramatic turnaround, in the summer of 2012 St. Hilaire discovered the Canadian Drip Primer and the DRiP Investing Resource Center.
“I figured I could try my hand with good dividend stocks with nice yields …I built myself a 10-stock portfolio with no real investing plan whatsoever. I would buy what I would feel like buying.” By 2013, he and his partner were raising cash to buy a home, liquidated the index funds and transferred the stocks to their brokerage account. They still have three stocks: “I see the stock market going down and can’t help but tell myself to wait until my positions recover. Can you say ‘behavioral bias?’ “
Unable to stay completely out of the market, early in 2015 he restarted his Global Couch Potato portfolio in his TFSA, adding $200 every other week. “The dividend stock experiment was fun, but I don’t want to spend so much time researching companies and trying to find bargains. In my situation, going with market returns with a simple portfolio is appropriate. I just need to get over my own non-sense to finally become a pure, 100% index investor. And now that I just confessed this to someone, I might just do that.”
“Pure” since 2011
Another young investor who contacted me was Pat McIver (@mrpatmciver on Twitter.) After a brief fling picking individual stocks, he and his wife became “100% pure indexers” in 2011. They use only index-tracking ETFs for their RRSPs and TFSAs, and even for their toddlers’ RESPs.
“I had a professor at Carleton University tell me back in 2003 in his 3rd-year finance class that I shouldn’t bother trying to pick stocks, market time, or waste energy on trying to beat the market. He said the smartest thing we could ever do as investors was buy index funds (ETFs or mutual funds), and hold them.”
Despite this, after graduating, he dabbled in Nortel, RIMM, BMO, and CP but held them for only short periods and neither made or lost money. “I realized early on I was somewhat a risk-averse investor when it came to picking individual securities, and never had the confidence that I was able to identify the ‘winner’ fund or the ‘loser’ stock.”
With prescient timing, they withdrew funds from their RRSPs in August 2008 to buy their first home, and started to reestablish their RRSPs in January 2009 (also great timing!). They owned Altamira Canadian Index, TD International Equity Index Currency-Hedged and US Index and the actively managed TD Canadian Bond. They departed from this only to buy a few shares of Canadian Pacific.
In January 2011, after reading various blogs, including MoneySense, he switched his wife’s RRSP into iShares ETFs (25% XBB, 25% XIU, 10% XCS, 20% XSP, 15% XIN and 5% XEM.) Then Pat ditched the CP shares and a few mutual funds to go “all-in with index ETFs: 20% XBB, 35% XIU, 25% XSP and 20% XIN. “This past summer, I reduced the holdings in my wife’s RRSP from six to four.”
Pat says the blended annual cost is 0.31%. “We also switched our XSP for VUN and switched XIU for XIC to broaden our diversification in the US and Canadian markets, respectively.” They rebalance once a year.
“When we started investing again in early 2009, I decided we would go with a mostly-index-based portfolio. In 2011, I decided we might as well go on in and once our allocation weightings were set, just leave it and let it ride until we retire in 2036 (the earliest date we can retire as federal government civil servants).
As a busy family man with a two-hour daily commute, Pat is happy “knowing I have a broad-based diversified portfolio that is low-cost and contains minimal funds gives me great comfort (and no sleepless nights) that I don’t have to worry about whether I am “winning” or “losing” vis-a-vis the market. I doubt I would ever go back to being an active investor ever again.”
So, counting Hallam and a handful of advisors I know, I’m aware of half a dozen truly pure indexers. Anyone else out there? Email me at firstname.lastname@example.org.
Why? Mister Canadian Couch Potato himself, Dan Bortolotti — now also an investment advisor for PWL Capital Inc. — explains the behavioural investment quirks that makes the simple complicated in my Wednesday blog at MoneySense.ca.
You may have heard the phrase “robo-adviser” but as implemented in Canada, the phrase “light advice” may be more appropriate.
Read more here in my column in the Financial Post.
For purposes of continuity and “one-stop-shopping” I’ve included the piece below, and added the minor clarification that Wealth Simple has now received regulatory approval.
The term robo-advisor has come into widespread use in recent months, with a handful of firms starting up in Canada.
The model for this is Palo Alto, Calif.-based WealthFront, founded in 2008. It describes itself as an “automated investment service.” It assembles portfolios of passively managed exchange-traded funds (ETFs), matching client investment objectives and risk tolerance to the ETF selection, with appropriate asset allocation and regular rebalancing.
The fees are low: nothing on accounts below US$10,000 and after that it bills clients monthly at a rate equivalent to 0.25% annually of assets under management (plus the fees of the underlying ETFs, many of which are from Vanguard).
Subscription-based Couch Potato service
One of the first Canadian equivalents is Toronto-based NestWealth.com, launched by Randy Cass starting in Ontario and set to roll out nationally this year. I call this a “subscription-based Couch Potato service.” Cass got the idea from watching his son watch the subscription-based Web TV service, Netflix.
For $80/month (or $40/month for those under 40) customers can “subscribe” to a service that chooses and monitors a portfolio of ETFs — selected from Vanguard Canada and Black Rock Canada’s iShares families. As with similar services, NestWealth will worry about asset allocation and rebalancing.
Wealth Simple now approved
Awaiting regulatory approval — now received — is Michael Katchen’s WealthSimple, a “light advice” model that takes a more traditional approach of levying an annual asset-based fee of 0.5%, which will be above and beyond the underlying fees of the ETFs themselves. Fees taper down with higher amounts of wealth.
SmartMoneyInvest.ca about to launch
Also about to launch is another Toronto-based firm called Smart Money Capital Management, which will operate on the web as www.smartmoneyinvest.ca. Founder and managing director Nauvzer Babul told me in an interview that “no one in this space calls themselves robo advisors. The term was coined in the United States, where everything is very automated. My goal is to be between that and where we are in the Canadian investing space, where there is advice and a person to meet with. Clients can speak with live people who try to understand their risk tolerance and understanding, then develop a portfolio around that. There’s definitely human interaction.”
At least in the Canadian model, “light advice” seems a better description than “robo-advisor.” In any case, fees will be higher than what do-it-yourself (DIY) investors would pay buying their own ETFs at discount brokerages (perhaps aided by some fee-for-service advice from a human financial planner). On the other hand, fees of these automated or semi-automated portfolio management systems should come in well below “wrap” programs offered by major Canadian financial institutions and certainly below the Management Expense Ratios (MERs) of most actively managed retail mutual funds sold in Canada.
In other words, a DIY investor might pay just the MERs of the underlying ETFs, meaning somewhere between about 0.10% and 0.55%, depending on the products chosen. Wraps and DSC mutual funds typically come in between 2.5% and 3% or a tad above that. So you can figure a typical robo-advisor or light advice service should come in somewhere between 1% and 1.5%, including the MERs of the underlying ETFs.
In the case of Babul’s firm, the annual asset-based fee charged is 0.45%, on top of the underlying ETFs, so the total portfolios should come in around or slightly below 1%, all in.
Retail investors take on too much risk picking stocks
What kind of value can investors derive from such a service? Babul provides an interesting response, drawing on his 13 years of investment banking experience at BMO Capital Markets, which he left three years ago. In managing its derivatives business, Babul developed an intimate understanding of risk management. He noticed that retail investors tend to take on more risk than institutional investors. “I believe individuals picking individual stocks are taking on too much risk. Many institutional investors are more index-based than stock-pickers because they don’t want to be exposed to undue systematic risk.”
Babul’s goal is to invest clients in diversified global portfolios of ETFs. “We’re not trying to beat the market, but just create a diversified portfolio that adequately manages their risk tolerance.”
I ask whether there was a time when Babul ever believed in market timing and stock-picking.
“I saw my portfolio’s performance.”
As any investor is well aware, keeping up with global politics, macro-economics, regional currency fluctuations plus the vagaries of sectors and individual stocks is almost a full-time job. The wealth of digital sources available on the web and through iPads, smart phones and the like is both a blessing and a curse.
Of course, if you’re strictly a purist “index” investor, you can largely ignore the noise as it relates to making individual portfolio adjustments, apart from occasional rebalancing of asset classes. However, based on the feedback MoneySense got from Preet Banerjee’s article on Core and Explore investing, I suspect more investors — even occasional indexers — are much more active in making tactical portfolio adjustments.
Bottom line is most of us need to make some effort to keep up with economic and financial developments around the world. But I’ve found the very ubiquity of information and technology can be harnessed to our advantage, no matter how busy we are. In my own case, I have a commute of almost an hour in each direction, much of it on the subway.
I’ve found that various financial audio (and video) podcasts downloaded to an iPhone (and most other devices) is a useful way to absorb information while commuting or exercising, or even waiting in the many lineups life can subject us to over time. Here’s a rundown of some daily and/or weekly podcasts I find useful:
BBC World Service Global News: This is a handy global affairs roundup of 20 to 30 minutes that is available every 12 hours.
BBC World Business Report: a less frequent podcast of different durations more focused on economics, business and investing.
BBC Documentary Archive: long (25 to 40 minutes) audio documentaries that are indepth on a single topic (a recent one was on Hillary Clinton)
Bloomberg on the Economy: Usually single-source summaries of between 5 and 20 minutes with various economic and investment experts around the world. Alternative is Bloomberg — All Podcasts.
FT Money Show: Weekly 20-minute podcast from the Financial Times
The Economist All Audio: 7 to 15 minutes most days often on single world political events and occasional financial topics. Those who subscribe to the iPad edition of the Economist can also download audio of the entire weekly magazine: good for absorbing world events on long walks or treadmill sessions!
60 Minutes Podcast: Weekly 45-minute full-audio podcast of the famous TV show.
Jim Cramer’s Mad Money; 45-minutes daily in the week: full video of Cramer’s manic but often insightful take on (primarily) the U.S. stock market. This guy is the “anti-indexer” but does sometimes recommend ETFs outside the US market. He’s been preaching diversification and lately has been positive on both gold (the GLD ETF) and Canada broadly.
Motley Fool Money: Weekly audio show just under 40 minutes: excellent wrap-up of the week’s major events in the U.S. stock market, usually with 3 or 4 guests. Good to listen to while exercising on weekends: most recently I listened to it while grocery shopping!
The Disciplined Investor: Weekly hour-long podcast by Andrew Horowitz, usually with special guests.
NPR Planet Money: 20 minutes or so every few days on quirky topics like “why buying a car is so awful”
The Suze Orman Show: Weekly 45-minute full video of Twitter’s most-followed personal finance guru.
The Dave Ramsey Show; 40 minutes but not having listened to this one yet, can’t comment further.
Mostly Money, Mostly Canadian: 20 to 40 minute occasional podcast by Preet Banerjee and the title aptly sums it up. Various guests, including an appearance by myself.
Financial Post: Various audio podcasts from staff writers from Canada’s daily financial newspaper.
As noted in my Wealthy Boomer blog here, American indexing guru and author Charles Ellis [seen in photo on left] gave Canadian money managers both a history and arithmetic lesson on Tuesday. His point in a nutshell is that annual mutual fund Management Expense Ratios (MERs) of 2.5% or so (in Canada) are “terrible” but even the investment counselling fees of 1% (plus or minus 50 basis points) are also excessive.
These numbers may seem small when expressed as a percentage of assets but Ellis said the way to look at it is as a percentage of the return generated by active managers. So even if the active manager could generate a pre-fee return of 10%, the 2.5% fee takes that down t0 7.5%, so amounts to a 25% reduction of the return: or ten times the 2.5% figure that seems so insignificant. If returns are more likely pre-fee 6 or 7%, then a 1% fee takes it down to 5 or 6%, and amounts to a 15% reduction of return, he said.
Ellis himself prefers market-cap weighted index funds or ETFs of firms like Vanguard Group (which recently set up shop in Canada.) Investors can buy the “market” for as little as 10 basis points (0.1%), which long ago was a figure that customers of money managers were accustomed to pay. But as he related in his Monday talk in Toronto, customers didn’t balk when one firm hiked it to 25 beeps, others followed suit and eventually even a full 1% didn’t seem out of line.
This cost-conscious approach consistent with Findependence Day model
None of this should surprise readers of this blog, since the Findependence Day model cuts costs to the bone by emphasizing use of discount brokerages to cut commission costs, and then implementing trades of ETFs or index funds, the fees of which will range from about 8 or 9 beeps to 55 beeps for most mainstream ETFs, and perhaps a bit more for some esoteric ones. Of course, you can also try and pick your own individual securities, although Ellis would probably call that the “loser’s game,” as per the title of his book, Winning the Loser’s Game.
The third point is that you can still benefit from good advice by engaging a fee-only financial planner who charges by the hour, month, quarter or year, or perhaps by the project (which might be a financial plan or portfolio assessment). You can also go the fee-based route but keep in mind that a 1% fee will be on top of the underlying MERs of the ETFs, which could easily run 1.5% or so. For some investors, especially buy-and-hold investors who don’t trade frequently, a traditional commission-based full-service advisor could make sense from a cost perspective, at least relative to a high-fee-based alternative.
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