I enjoy listening to Dan Bortolotti’s Canadian Couch Potato podcast. One of the best parts is a regular segment he calls, “bad investment advice”, which takes aim at myths and misunderstandings about the markets. It’s not hard to find an article in mainstream media where the author is spinning half-truths, conflicted advice, and downright dangerous information to their audience. Dan not only found the bad investment advice, but picked apart the arguments to help his listeners uncover the truth.
It’s a shame that Dan has decided to stop producing new episodes of his podcast (this week’s ETF deep dive with Erika Toth will be the final episode) because the Toronto Star offered up some perfect fodder for his bad investment advice segment. In fact, you might call this recent column by Lesley-Anne Scorgie the worst investment advice of the year.
The original headline read, ‘Why Low Fee Investment Products Are Bad For You’, and if the editor was going for a click-bait title then it sure worked on me. I gave it a read, and started fuming. First of all, it read like a mutual fund ad. It made me think of the original Wealthy Barber (published in 1989) and the chapter on picking winning mutual funds that can generate a 12 percent return. Chilton himself has admitted this was a mistake, and corrected it in The Wealthy Barber Returns.
The author made all kinds of head-scratching and outrageous claims, including:
- “Your rate of return is more important than fees.” Actually, your rate of return is not knowable in advance. We do know the fees in advance, and a mountain of evidence says low fees predict better returns.
- “ETFs are one-third the cost of mutual funds.” The average equity mutual fund MER is north of 2 percent. Most market-tracking ETFs charge less than 0.20 percent. That’s one-tenth the cost.
- “The markets in North America have had a very good ride upwards since the beginning of 2016, when they’d taken quite a tumble. This has informed investors wondering if there is much more room for major market growth.” Huh?
- “Could it be that ETF investors are actually buying at a high rather than following Warren Buffett’s most important rule — to buy at a low and then sell at a high?” How dare you invoke Buffett!
Scorgie claims that with research and guidance investors can avoid poor performing investments and instead buy the ones “that are generating a strong rate of return (ROR).” To do that, investors should look for above-average rate of return for the majority of the past 10 years. She also claims there’s independent research that indicates the rate of return is worth the risk.
Finally, she closes with the most egregious take on fees – what you might hear from someone who’s paid to sell actively managed mutual funds with high fees:
“Even if the funds or your adviser’s fees total 2.5 percent, if the ROR is 12 percent, net of fees, you’re making 9.5 percent. So long as the net ROR is above the market ROR, you should be happy to pay those fees.”
Of course it would be great if we knew in advance that we could get a market beating return on our investments, after fees. Then her argument makes sense. But you can only know the return in hindsight. While, sure, a small percentage of actively managed mutual funds might beat their benchmark over a five or even a 10 year period, the vast majority don’t even come close. And it’s impossible to identify the winners in advance.
I got so worked up about this bad investment advice that I went on a bit of a Twitter rant:
Uhhh, @Lesleyscorgie – this is bad advice that reads like a mutual fund ad and has been refuted many times.
Why low-fee investment products are bad for you https://t.co/xBzWLECeXk
— Boomer and Echo (@BoomerandEcho) August 26, 2019
Three days later Scorgie offered up a lame explanation that blamed the Star for writing a ‘misleading headline’, which has since been changed to read, “Low fees are important, but don’t overlook net rate of return.”
Sure, the headline was click-bait and as authors we don’t always get to choose the title of our publications. But the problem was the content, not the title. And for that reason, this piece gets nominated for bad investment advice of the year.
This Week(s) Recap:
I’ve been busy working through beta-testing for the new MoneyGaps financial planning tool that I plan to launch in the fall. I’ve completed about half the assessments from the test group, and so far the feedback has been terrific! Thanks to everyone who expressed interest in joining the test group. We had more than 100 comments, but unfortunately could only take 20 people in the trial (even that has proven to be ambitious). But, I promise you’ll be impressed with the launch of this low-cost financial planning tool and I’ll have special introductory pricing for Boomer & Echo readers.
Last week I opened the money bag and answered reader questions about cell phone and data options for travellers, digital savings platforms, indexing versus dividends, and more.
Then I looked at CPP Payments and how much you’ll receive from Canada Pension Plan in retirement.
Earlier this week I shared an easy way to invest responsibly with RBC InvestEase.
Speaking of the RBC InvestEase platform, this article looks at the difference and similarities between their Responsible Portfolio and Standard Portfolio options.
Weekend Reading:
Lots of catching up in this edition of weekend reading, so let’s get to it!
Thanks to Jonathan Chevreau for including me in his latest MoneySense column about the pros and cons of dividend investing.
Stephen at Credit Card Genius explains how you can win 3,500,000 Aeroplan Miles with Air Canada.
Travel expert Barry Choi explains how credit card travel insurance works when booking a flight on points or miles.
A guest poster on Cut the Crap Investing looks at retirement funding and making the most of GIS and CPP benefits.
Jason Heath explains how to save for retirement when most of us aren’t saving much at all:
“Saving for retirement is not an algebraic equation. There is not just one answer, and the answer constantly changes. This is a frustrating financial fact at a time when we are used to getting answers on demand and making decisions based on short, sweet social media posts.”
Ted Rechtshaffen shares his view on why Canada should eliminate minimum RRIF withdrawals entirely. Interesting idea.
Michael James helps a reader who’s wondering whether to start drawing down his RRIF.
Michael Batnick, Ben Carlson and Downtown Josh Brown share the seven deadly sins of investing and why they can be so destructive to investors who aren’t aware of them:
Some people think teaching financial literacy is a waste of time unless we can deliver a ‘just-in-time’ solution as needed. But Preet Banerjee says it’s not time to give up on financial literacy.
My Own Advisor blogger Mark Seed shares 10 ways to get retirement ready.
I love hearing from actual early retirees (not bloggers) about their experience in retirement. Here’s one from the Tread Lightly, Retire Early blog.
City dwellers could be tempted to treat their house as a retirement plan. But what happens if they don’t want to move when they’re old?
As housing costs soar, families are struggling to decide whether to renovate or move.
Here’s Nick Magguilli on the investor arms race and why investing never gets easier.
Finally, Morgan Housel smartly explains why complexity and length sell, when simplicity and brevity will do.
Have a great long weekend, everyone!
This post is sponsored by RBC InvestEase Inc. All views and opinions expressed represent my own and are based on my own research of the subject matter.
Responsible investing is something on the minds of many investors today. They’re concerned about the environmental, social, and governance (ESG) aspects of economic activities. Once considered a fringe movement, retail investors increasingly want to incorporate these considerations into their investment decisions.
With a Responsible Investing Portfolio, like the one offered by RBC InvestEase, investors can help drive positive change by investing in companies aligned with their values without necessarily giving up financial returns.
What is responsible investing? How is it different from “standard” investing?
Responsible Investing (RI) describes an investment approach that measures how a company manages its Environmental, Social and Governance (ESG) risks in the operation of its business.
- Environmental factors include: Carbon emissions, waste disposal, water management.
- Social factors include: Workplace health and safety, labour management, privacy/data security.
- Governance factors include: Tax transparency, board independence and composition, ownership.
The Responsible Investing approach used in RBC InvestEase’s portfolios focuses on companies with the highest ESG factors. The process removes companies involved in the business of tobacco, controversial weapons, and civilian firearms while also omitting companies involved in severe controversies. The remaining companies are assessed on how effectively they manage their ESG risks. The RBC InvestEase Responsible Investing portfolio emphasizes companies considered to be better managers of these risks versus their industry peers.
Open an RBC InvestEase account today and pay no management fees for 12 months!*
Who is responsible investing for?
It’s a personal choice.
The key is having that choice. RBC InvestEase offers both a Responsible Investing and a Standard portfolio to help clients reach their financial goals. I happen to think that any investor who contributes regularly and has the discipline to stick with their strategy will be successful with either approach.
Responsible Investing will appeal to those looking for choice and wanting to invest with companies that effectively manage environmental, social, and governance risks.
For those who are more focused on fees, or who are not drawn to Responsible Investing, a Standard portfolio remains an excellent solution.
Performance:
Can you expect the same kind of performance from responsible investing as what you’d expect from “standard” investing?
According to RBC InvestEase, they’ve selected an investment approach to Responsible Investing that should not result in lower returns after fees versus a standard portfolio over the long term.
Fees:
One of the knocks against Responsible Investing has been the relatively high fees to gain access to a managed portfolio. So, does it really cost more to invest responsibly?
RBC InvestEase charges the same low fee of 0.50% to manage both their Standard and Responsible Investing portfolios.
The ETFs used in the construction of RBC InvestEase’s Responsible Investing portfolios have a slightly higher management expense ratio (MER) versus their Standard portfolios. Put into dollar terms, if you pay a 0.07% higher MER on a $25,000 portfolio that’s only an extra $17.50 per year to invest in a Responsible Investing Portfolio.
Final thoughts
The world of investing is changing for the better with more individuals and companies linking sustainability efforts with the long-term health of organizations and the economy as a whole.
It’s possible to build an investment portfolio while also doing good things with respect to people and the planet.
Open an RBC InvestEase account today and pay no management fees for 12 months!*
*RBC InvestEase will pay boomerandecho.com a one-time fee when you open an account managed by RBC InvestEase, invest $1000 at account opening and maintain a minimum investment of $1000 for 90 days after the date of account opening.
Today I’m answering reader mail for a feature I call the Money Bag. I’ll answer questions and address comments from readers on a wide range of money topics, myths, and perceptions about money. No question is off limits, so hit me up in the comments section or send me an email about all the money things you’re dying to know.
This edition of the money bag answers your questions about cell phone and data options for travellers, a no-more air travel pledge, digital savings platforms, taking the commuted value of a pension, and dividends versus indexing.
First up is Peter, who reminded me that I promised to write about my experience with cell phone and data plan options when travelling overseas. Take it away, Peter:
Best Cell Phone and Data Options for Travellers:
“Hi Robb. I think you mentioned you would share info on your experience with cell phone options while travelling. I’m heading to Scotland for three weeks in September. Any thoughts?”
Hey Peter, thanks for your email. Three weeks in Scotland sounds amazing! We seriously didn’t want to leave, and even looked into an Ancestry visa to move there, it’s that stunning.
I did plan to write a post about this but hadn’t got around to it yet. My phone is with Bell and I found they had terrible global data options. My wife’s is with TELUS and they had a better plan – $8/day for unlimited data and that was capped at $180 (I think) for 30 days.
Instead, we went with a service called KnowRoaming. You buy a global SIM card (or sticker for your own SIM card) and then insert it when you get to your destination. Follow some basic instructions and purchase your desired plan and you’re good to go. I liked it because, well, it worked, and also because you preload it with $$ credits (like a prepaid Visa) so you can’t get into trouble if you mistakenly download an entire podcast series using data instead of wifi.
The packages were great. I bought 3 days of global unlimited data for $9.99 – and did that 10 times, so it cost about $100. There’s cheaper data options if you don’t need unlimited (Europe 5 GB 30 days is $39.99).
Finally, it assigns you a U.S. phone number, which was kind of odd but it worked. We also bought a local phone number in Ireland through the KnowRoaming app for $4.
They have a refer-a-friend option so you can get 30% off the global SIM sticker or SIM card using my referral code ROBEN46 at www.knowroaming.com.
No More Air Travel Pledge
Here’s Michael, who is concerned about the impact of air travel on the planet, but still wants to earn and use credit card rewards points.
“Hi Robb. Most travel cards are geared toward airlines, lounges and associated rewards related to air travel. Since we have decided to take the no more air travel pledge, except in emergencies to visit family, what card works best if we are now restricting ourselves to train travel and electric car travel.
As consumers are beginning an evolution towards a more planet conscious citizenry, there may be more of us looking for planet saving alternatives in our financial products. I would be interested to know what you think. And would further be interested in how to get the finance industry to create products for people like me. Or are they there and I am just not seeing them?”
Hi Michael, thanks for your email. Great question, by the way. And I applaud you for taking the ‘no more air travel’ pledge.
I think you still have a few options to earn rewards that have nothing to do with flying. One may sound contradictory, but it’s the
Another option is the PC Financial World Elite MasterCard, where you earn PC Optimum points that can be used instantly in-store at Loblaws stores and Shoppers Drug Marts.
You could get a hotel rewards card, like the
Finally, any card that allows you to charge a travel purchase (be it plane, train, car rental, hotel) and then clear it off your statement with your points balance is a good one because of the flexibility it offers. You can book on your own, likely saving money by shopping around, and then “erase” that charge off your bill by paying with points.
Some examples include the
So, to answer your final questions, I’d say these products are out there – it just takes some creativity to use them in the way that’s most beneficial and still fits with your values.
Digital Savings Platforms
Debbie wants to get my thoughts on a digital saving and investing platform called Mylo:
“Hi Robb, a lot of Millennials are using Mylo for investing purposes. I am just wondering about your thoughts on this service, as my daughter and her friends are quite enthusiastic about it.
Hi Debbie, thanks for your email. I don’t have any direct experience with Mylo but I understand it to be an app or platform that rounds-up your purchases and saves or invests the difference using a portfolio of low-cost ETFs (like a robo-advisor). I think it’s a pretty neat concept and anything that gets young people excited about saving and investing has my support!
I know some other services like Wealthsimple employ the round-up feature within their platform as well – which has proven to be popular.
Investing the Commuted Value of a Pension
Here’s Wayne, who wants to know how I’d invest the commuted value of my pension (assuming I’d take it over leaving it in the plan).
“Hi Robb, Like many, I’ve been following your progress. Well done! I am particular interested in the Commuted Value of your pension. I have been tracking mine for the last 10 years. Assuming that you take the cash as opposed to a pension, have you thought about how you would invest (safeguarding the principal and providing for many years of potential retirement)?”
Hi Wayne, thanks for the kind words. I’m torn about taking the commuted value versus the pension for life. It’ll all depend on when I leave my current employer. If that’s in the next 2-5 years then I’d be more apt to take the commuted value and just invest in something like VGRO inside a locked-in retirement account. If I stay longer then the pension becomes more attractive.
The pension is more attractive at that stage because you can eliminate stock market risk and never have to worry about your money running out.
On the other hand, pension valuations are extremely complicated and can vary widely depending on bond interest rates, among other things. I would not be surprised to hear about $200,000 swings in valuation depending on when you ask for an estimate. To me, that’s another good reason to take the pension rather than being subject to the whims of a calculation at the wrong time. At least with the pension you have a “defined benefit” and know exactly what you’re getting.
Indexing versus Dividend Investing
Finally, here’s Shawn who wants to know how indexing compares to dividend investing in a downturn.
“Hi Robb, you switched to index investing in 2015. Do you think index investing will beat dividend stocks during a recession? Also what percentage of bonds should someone in their 40s hold? Thanks.”
Hi Shawn, thanks for your email. I have no idea whether indexing will beat a portfolio of dividend stocks during the next downturn. The reason why I switched was because I believe the strategy will outperform over the very long term (20-30 years). I also prefer the simplicity of holding one ETF rather than keeping track of a portfolio of 25-30 stocks.
Most investors should hold bonds in their portfolio to lower the volatility with the goal of helping you stay invested during the bad times. Take a look at these statistics which show different portfolios from conservative to aggressive. The conservative ones performed very close to the aggressive ones over a 20-year period without the huge losses during bear markets:
There’s nothing wrong with a traditional 60/40 split between equities and fixed income, and you can get that with just one ETF from Vanguard’s VBAL product.