"I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two."


- Warren Buffet

The "So-Called" Experts Part II

“From 2001 to 2006, managed funds underperformed their index in all 9 style box categories.”

"There is simply no way under the sun to forecast a fund's future returns based on its past record."


- Jack Bogle, Founder of the Vanguard Group

Tip: Don't Judge a Mutual Fund by it's Rating

The first thing I did when I started gaining interest in mutual funds was Google the top funds in Canada.  I arrived at the Globe and Mail 5-star Report on mutual funds and immediately thought to myself how easy it would be to choose a successful investment; just look at the rating and pick the best one.

Good thing I decided to save money and read a few books before I invested in something.

A 5-star rating does not predict success

In fact, in 2004 Mark Hulbert wrote in Forbes Magazine stating that the average growth of the top funds on Morningstar in the past decade was 5.7%, compared to 10.3% for the Wilshire 5000 Index Fund.

Additionally, a study by Barksdale and Green on 144 institutional equity portfolios from 1975 to 1989 found that the portfolios that finished in the top 20% in the first five years were the least likely to finish in the top half in the last five years.

Morningstar even states on their website that these ratings shouldn’t be used to predict future performance.

So why do these ratings even exist?

Because people believe them.  Although the government requires by law that a statement must be made about the lack of correlation between ratings and future performance, the 5-star funds are still advertised like buying into them provides guaranteed returns.

I’m not saying that these ratings don’t provide any useful information. The Globe and Mail website states that historically, on average, their top rated funds do better than the others over a six month to two year period.  Whether you want to believe that or not is up to you; what is important to remember is that it if you are going to take the rating into account, it should not be the only, or even the major, indicator of performance that you consider.  Instead, factors that influence cost, such as the expense ratio, can provide real information about what will happen to the money you invest into a particular fund.

In reality you should never make an investing decision based on one factor, but this is especially true for fund ratings.  Do your homework, read the prospectus, and make wise decisions based on facts with some inherent value.

Tip: Be Smart with Taxes

Not all of your investments can be made in a tax-free account.  Minimize the damage taxes can do by placing heavily taxed funds (ie. bond funds) in a retirement account, and the tax-friendly funds (ie. a tax-efficient index fund) in a taxable account.

The "So-Called" Experts Part I

“From 1995 to 2004 the average expert-picked stocks grew 8% annually.  The Market Index grew 9.5%”

2010-2011 Guide to RRSPs

Few people are taking advantage of their RRSPs; read this and don't be one of them!

"The expense ratio is the only reliable predictor of future mutual fund performance."


- A study by the Financial Research Corporation

Tip: Be Wary of Turnover

When deciding which fund to invest in, make sure you take a look at the turnover rate on the prospectus.  High turnover results in high costs which are correlated with a lower return.  The Bogleheads estimate that costs due to turnover equate to about 1% of the turnover rate, and as we know any extra cost you incur comes right out of your investment.

Another reason you should always read the prospectus!

Morningstar.ca Investing Resources

Canadian guides on mutual funds, portfolios, stocks, ETFs, and more!

"Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals."


- Warren Buffet

Tip: Fees and Mutual Funds

Keep costs as low as possible when investing in mutual funds; the general idea that the more we pay the more we receive does not apply in this case.  Every dollar spent on fees is one less received by you.

Here is an example from the Bogleheads Guide to Investing:

If I start investing $3500 a year at the age of 25 until the age of 65, with the long-term stock return average of 10.5%, I would accumulate $1,961,795.  If I continued to invest that money at the same rate past the age of 65, I would receive an average annual income of about $200,000.  Of course you aren't guaranteed these returns, but let's assume you are just for comparisons sake.

However, let’s say I invest the same amount but have only a 7.2% return due to 3.3% annual costs.  At the age of 65 my investment would be worth $788,745. This would result in an average annual income of  $56,790 past the age of 65.  That is less than half the total value and less than a third of the average annual return!

A cost of 3.3% per year is the difference between living in luxury making an average of $200,000 a year, and getting by on $56,000 a year during retirement.  You can see why keeping costs low is extremely important.

Focusing on what's Relevant: Canadian Investing

There is an incredible amount of information out there on investing, so much in fact that it is hard to narrow down what is relevant.  The other day I went to my local Chapters to get a glimpse of the resources that were out there, and I was reminded of something I had thought about once before.  A lot, and I mean the majority, of the resources I found were based on American investing.  This probably isn’t a problem for the more seasoned investors out there who can probably take the most important messages of the books and apply them to the equivalent opportunities available on Canada.  However, for someone just starting out it can be difficult to distinguish between what is relevant for Canadian investing, and what is only available in the United States.

For example, in the Bogleheads Guide to Investing they often suggest maxing out Roth IRA funds.  I was beginning to wrap my head around the concept of IRA’s when I realized these plans are specific to the United States.  Of course this is just a retirement plan so I am guessing that a Canadian RRSP is similar, but what if there are minute differences that make all the difference when making investing decisions?  Should I follow the advice about IRAs and just apply them to RRSPs? What concerns me is that I don’t know, and I’m sure this isn’t the only case.

So while the best and most reputable books are on American investing, I feel that I should supplement them with some Canadian resources.  I purchased one of the only Canadian-specific guides available at chapters (a whopping 90 pages long), and I am hoping it will give me some perspective on what is relevant to me.

I have also decided that if I find any good Canadian resources, I will post them with a unique tag or title so they are easy to find.  I’m sure I’m not the only one with this problem, so I think a solid list of Canadian references would be beneficial for everyone.

"Sit down and draft an asset allocation plan. If you don’t know how much of your total net worth is allocated to each asset class and why, then you’re making about the worst mistake in investing."

- Gary Ginsler, former under-secretary of the Treasury

- Gregory Baer, assistant secretary for Financial Institutions

"Your portfolio mix of asset classes will be far more important in determining its performance than will be your selection of individual securities or mutual funds." 

- John Merrill, author of Outperforming the Market

My Recommended Asset Allocation

John Bogle recommends that the amount you invest in bonds should be equal to your age.  It only seems fitting that the Bogleheads suggest that a young investor such as myself adhere to the following allocation guideline:

55% domestic large-cap stocks

25% domestic mid/small-cap stocks

20% intermediate-term bonds

Of course this is not set in stone for everyone, but it seems like a good place to start.

Project Part III: Quick Update

I made the mistake of applying online for the TFSA because I was lazy and thought it would be easier.  It took about a week for the forms to arrive and now I have to mail them back to TD, after I signed a few things.  Hopefully it won’t take too long for them to receive everything, but I’m becoming more and more aware that a 15 minute phone call might have been an easier way to set it up.

Just to relay what is on my mind right now; the Bogleheads give a very good recommendation for no-load mutual funds.  I haven’t read enough to make any decisions but it feels like I will be making a visit to TD to discuss what they have to offer.  I’ll further outline my goals and ideas when I have a better understanding.

In the mean time I am right in the middle of exams so I have to focus on that, but I plan to read a lot more once all of this is over with.

Stay tuned!

Project Part II: Baby Steps

Even the biggest projects have to start somewhere.  The question is, how should I start?  Part of me is tempted to jump right in and learn from experience, as I find that approach can often produce the quickest results.  The other part of me knows that such a move might be foolish and result in some bad decisions and some lost money.

Because I was in no place to weigh the options myself, I made a post on the Bogleheads forum and asked for some advice.  I suggested myself that I open a tax-free savings account.  There would be two benefits to this.  First, I would practice putting money away that I have earned; always important. Secondly, by the time I know enough to make a calculated risk I would have accumulated enough money to make a substantial investment.

The Bogleheads agreed.  The general response was that saving my money while I learn would be the best thing I could do, thus avoiding making any stupid mistakes (like many of them had made).  

So I have applied online for a “Tax-Free High Interest Savings Account” at TD Canada Trust, and I will begin depositing a few hundred dollars a month as I read a few books.  The interest rate is only 1.5%, but this decision is more so for the discipline than anything else; the rest is simply a bonus.

A good first step, I think.