My wife and I hiked up Grouse Mountain yesterday. It’s a gruelling three kilometre, 2,830 step, near vertical climb known as the Grouse Grind. At the quarter mark there’s a sign warning hikers that the trail gets even more narrow and steep from here, and if you can’t go on, this is the only point you can turn around and climb back down.
We reached the summit in just over an hour. Since hikers cannot climb back down Grouse Mountain, they must take the gondola to the bottom at a cost of $15 per person. That’s right, what many think is a free hike turns into a $15 money-grab where hikers literally have no choice but to pay their way back down the mountain.
This got me thinking about the current deferred sales charge debate. Certain members of the investment industry argue that deferred sales charges are necessary for advisors to service small or first-time investors. The advisor gets a large upfront commission that the investor does not have to pay out of pocket, however if the investor transfers or sells the fund within a certain time period (usually seven years), he or she pays a deferred sales charge upon redemption.
Through this model, companies such as Investors Group and Primerica can pay an army of sales people to recruit new clients to start investing with them. Investors, usually unbeknownst to them, get trapped into a deferred sales charge arrangement that is a bit like the Hotel California: They can check out anytime they like but they pay a tremendous price (up to 5.5 percent of their investment) to leave.
Deferred sales charges hurt investors. Period. And when investment fees are already sky high in Canada there should be no reason to add to the pain by imposing another punitive fee for investors to sell their funds.
That’s why I was sickened to see this tweet from Ontario finance minister Victor Fedeli cozying up to Advocis, a key lobbyist for the investment industry that is clinging their compensation model at the expense of Canadian investors.
Deferred sales charges hurt investors, plain and simple. A blog reader shared his statement: $240,000 invested in IG mutual funds. Hardly a small investor. Funds purchased between 4-5 years ago. DSC upon sale is $10,000! #hostage #shackles #predatory #loweringthebar #bantheDSC https://t.co/gKisFXqaDE
— Boomer and Echo (@BoomerandEcho) October 18, 2018
Furthermore, shame on the Financial Post for giving print space to the CEO of Primerica to praise the Ontario government’s overturning the ban on deferred sales charges (the tool Primerica uses to pay its army of salespeople). Pathetic. It’s time to end deferred sales charges and lower fees for all Canadian investors.
This Week’s Recap:
On Monday I wrote an investing guide for beginners who want to get serious about saving for retirement.
Over at the Toronto Star I wrote about the age-old financial dilemma: Save for retirement, or pay down the mortgage?
Many thanks to Rob Carrick for linking to this important post on being an executor in his latest Carrick on Money newsletter.
Weekend Reading:
Probably the best explanation of the Financial Independence Retire Early (FIRE) sub-culture you’ll ever read, by Vicki Robin, author of Your Money or Your Life.
On the flip side, here’s how to make the best of a bad job you can’t leave.
And John from ESI Money explains what FIRE people do when the market’s on fire.
Earlier this month 200 ‘Bogleheads’ came together in Pennsylvania to pay homage to their hero (Vanguard founder Jack Bogle) and share their advice about keeping investments simple and fees low.
Here’s Jack Bogle on what he thinks expected returns will be from stocks and bonds over the next decade:
One of the best ways to teach anyone about money is to tell stories. Here Jason Zweig shares a good one from the Great Depression about eating an apple down to the core.
Should you put all of your retirement savings into one low-fee balanced ETF? Dan Bortolotti has the answer.
This common retirement savings advice is sneakily wrecking people’s finances.
Ethical questions surround the investment portfolio of the Canadian Pension Plan Investment Board (CPPIB), which was found to hold investment stakes in guns, cigarettes, and prisons. I’ll have a post or two on ethical investing in the coming weeks.
A Wealth if Common Sense blogger Ben Carlson uses a basketball analogy to make a point about consistency and staying in the game (financially speaking):
“[Kobe] Bryant avoided taking charges to prolong his career to avoid wear and tear on his body. And it worked until injuries finally caught up with him at the tail end of his career. Bryant played for 20 years, finishing in the top 15 for most games played of any player in NBA history.”
Even the folks running pension plans think you’re not saving enough for your retirement.
Excellent research by Michael Kitces on how birth year shapes a generational experience in stock market investing.
If you bought a home two decades ago or longer you’ve likely seen a large run-up in prices…enough to believe you’ve earned a massive annual rate of return on that investment. Michael James compares his house purchase in 1993 with that of his stock portfolio and finds that stocks outperformed by a wide margin.
Dale Roberts explains how Canadian markets have fared this year and how to make that lack of growth seem insignificant in the long run.
What are normal stock market returns? Ben Felix explains in his latest episode of Common Sense Investing:
I’m fascinated by the Sears meltdown and here’s a good look into how one of America’s oldest retailers unraveled.
Finally, Paul Allen, the billionaire co-founder of Microsoft, passed away suddenly last week. With no spouse or children, his $26 billion estate may take years to unravel.
Have a great weekend, everyone!
Young readers often ask for investing tips and wonder how to get started. My typical response is that once you have a good handle on your finances – no credit card debt, student loans fully paid (or close to it), some cash saved up for emergencies, short-term goals are funded (or on the way) – then it’s probably a good time to start your investing journey.
Finding the right investing approach can be tricky for beginners. There are plenty of options available, from GIC’s and bonds to mutual funds, stocks and ETFs. Then you need to consider your age and risk tolerance. Do you have the stomach to handle stock market fluctuations of 25 percent or more, or would you prefer to see returns that are lower, yet less volatile?
If you’re serious about saving for retirement, you need an investing guide. Here are a few ideas to get you started:
Investing Guide for Beginners
First time investors: Building your portfolio
The best way to build up your investment portfolio is to start small and make it automatic. Determine what you can afford to contribute to your investments each month and set-up automatic transfers from your bank account on the days when you get paid.
Most people go to their bank branch to talk to an advisor about their investment options. Beware though; your financial advisor may be a mutual fund salesperson in disguise. More often than not a bank advisor will push their in-house mutual funds, which may come with some of the highest management expense ratios (MER) in the industry.
A good place to start is with a portfolio of index mutual funds. The cheapest and most widely publicized set of index funds is TD’s e-Series, which can be set-up for as little as $25 a month. Best of all, you won’t pay any commission or trading fees when you buy e-Series funds, which makes them the perfect vehicle for small, frequent contributions.
When it comes to asset allocation, I recommend using these three funds to get exposure to Canadian, U.S. and International stock markets, plus a Canadian bond fund to help lower volatility and lesson the impact of a market correction or crash:
| Fund type | Fund name | Allocation | Expense Ratio |
| Canadian Equity | TD Canadian Index – e | 25% | 0.32% |
| US Equity | TD US Index – e | 25% | 0.34% |
| International Equity | TD International Index – e | 25% | 0.49% |
| Canadian Bonds | TD Canadian Bond Index – e | 25% | 0.49% |
Note that you’ll need to open an account with TD, as you cannot access their e-Series funds from other banks or brokerages.
What to do when your portfolio reaches $25,000+
Once you’ve built up $25,000 or more in your TD e-series portfolio, it’s worth opening up a discount brokerage account where you can trade ETFs and individual stocks.
The $25,000 threshold is important because once your portfolio surpasses $25,000 then most discount brokerages waive their annual administration fee, saving you around $100 a year.
Exchange Traded Funds are worth a look at this point if you’d like to get more sophisticated with your investments; diversify into broader or more specific sectors, and lower your overall portfolio costs.
ETFs are securities that trade on a stock exchange and generally track the performance of an index. ETFs usually have much lower fees than mutual funds, but you might pay a commission every time you buy and sell.
Here’s a look at a model ETF portfolio that gives you exposure to different markets and asset classes for a fraction of the cost:
| ETF type | ETF name | Allocation | Expense ratio |
| Canadian Equity | Vanguard FTSE Canada All Cap Index (VCN) | 20% | 0.06% |
| Global Equity | Vanguard FTSE Global All Cap ex Canada Index (VXC) | 40% | 0.27% |
| Canadian Bonds | Vanguard Canadian Aggregate Bond Index ETF (VAB) | 40% | 0.13% |
Vanguard has also recently introduced a suite of balanced ETFs where investors can get exposure to all of the above with just one ETF. These all-in-one ETF solutions include a conservative blend of 40 percent stocks and 60 percent fixed income (VCNS), a traditional balanced blend of 60 percent stocks and 40 percent fixed income (VBAL), and a growth blend of 80 percent stocks and 20 percent fixed income (VGRO). DIY investing has literally never been so easy.
If you start using ETFs rather than index mutual funds, I’d recommend contributing new money just a few times per year rather than bi-weekly or monthly. This way you avoid paying a lot of commissions for your smaller transactions.
Consider a robo-advisor
At this point you might also consider using a robo-advisor to manage your investments. A robo-advisor provides portfolio management online with minimal human contact.
You fill out a risk assessment form online and then receive a personalized model portfolio built with low cost ETFs. The robo-firm takes a small fee to manage your funds, then monitors your portfolio daily and automatically rebalances it for you whenever it drifts beyond certain thresholds.
One compelling reason to have a robo-advisor manage your portfolio is that you automate the process and then get out of the way. Humans have a number of behavioural flaws when it comes to investing and our tendency to tinker (or dither) often leads to worse outcomes than if we were to just leave things alone (or follow a rules-based formula).
Using a robo-advisor is a good approach for those who don’t have the time or skill to manage their own portfolio, but who are savvy enough to understand that high-fee bank mutual funds are harmful to your wealth.
Also read – Nest Wealth vs. Wealthsimple: A tale of two robo-advisors
What about individual stocks?
I am a big fan of index funds and ETFs because they’re easy to use and they cost much less than the mutual funds sold by your bank or advisor. That said there’s a good argument to be made for investing in dividend stocks – particularly the type of companies that regularly increase their dividends.
Dividends can account for as much as one-third of market returns and the steady income comforts investors during volatile periods. Beware of high-yield stocks, and investing in companies with high or unsustainable dividend payout ratios. Avoid the temptation to chase the latest fad stocks and IPOs.
Discount brokerages such as the ones offered by the big banks can give investors free access to market research and stock screeners to help you track and build your investment portfolio.
The downside of a discount brokerage is the cost per trade, which can cost $9.99 anytime you buy or sell. A good rule of thumb is to limit the cost of your transaction to no more than 1 percent of the amount of stock you’re buying. For example if a trade costs $9.99 to execute you should buy at least $1,000 worth of stock.
Universal investing truths
Understand that there are two investing truths that have become more widely accepted today, but didn’t exist when your parents started investing.
One: The best predictor of a mutual fund’s future investment return is not the number of Morningstar stars it receives, but how low its expense ratio is.
Russell Kinnel, who works at Morningstar, had this to say about predicting future success:
“If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds.”
Two: Trying to beat the market is a fool’s errand. For decades, mutual fund managers attempted to win over clients with impressive research and statistics showing how they can make investors wealthy by outperforming the market (and their peers).
But active managers fail to beat their benchmarks more often than not. According to the SPIVA Canada scorecard, less than 20 percent of active Canadian equity funds outperformed the TSX over a five-year period ending December 29, 2017. That percentage dropped to 8.14 percent over a 10-year period.
The numbers are even worse for active U.S. equity funds, where just 2.2 percent of fund managers beat their benchmark over a five-year period and 1.67 percent beat it over a 10-year period.
The underlying point is that the odds of identifying successful fund managers in advance are vanishingly small. And if you happen to find a good fund manager, the likelihood that he or she will consistently outperforming their benchmark, after fees, is close to zero.
Final thoughts
One key message for beginner investors is to try and build good habits early on. Pay yourself first through automatic contributions and you’ll never miss the money.
Start with what you can afford, but remember to increase the size of your contributions often – once a year or more – and match it to the amount of your salary increase.
For example, if you get a 4 percent raise next year, bump up your contributions by 4 percent as well. On $50 a month, that’s just $2. It doesn’t sound like much, but it’ll make a huge difference over time.
Finally, as important it is to keep your investment costs low and your portfolio broadly diversified, keep in mind that it’s often our own behaviour that leads to bad investment decisions and poor outcomes. Know yourself and what makes you tick, and try to limit situations where you might act on emotion and divert from your strategy.
A growing number of Canadians plan on working longer because they haven’t saved enough for retirement. We see it at a macro-level; Canadian households owe a record $1.69 in debt for every dollar of disposable income, meanwhile the personal savings rate in Canada stands at a paltry 3.4 percent.
There are plenty of reasons why we owe too much and save too little. The economy stinks, people get laid off, and salary increases are few and far between.
That said we’re often our own worst enemy when it comes to taking care of our finances. Here are eight bad habits that are killing your retirement dreams:
8 Habits That Are Killing Your Retirement Dreams
1. You don’t watch your spending
It’s tough to stop a money leak when you have no clue where your money is going. Small daily purchases do add up (latte factor, anyone?), but these spending categories can bust your budget much faster – big grocery bills, dining out too frequently, filling your closet full of new clothes, one-click online shopping, and expensive hobbies, to name a few.
The solution: Write down everything you spend for three months. I guarantee you’ll have an ‘a-ha’ moment at best, and at worst discover something useful about your spending habits that you’d be willing to change.
The goal of course is to spend less than you earn. It’s one of the major tenets of personal finance.
2. You want the newest ‘everything’
Fashion and décor trends change, technology constantly evolves. Staying ahead of the curve means shelling out big bucks for the latest and greatest products. The problem is your capacity to buy new things will never keep up with the pace of innovation and change. It’s an endless cycle.
The solution: Wait. Early adopters pay a hefty premium to be first. Look no further than televisions, where the latest innovations can initially go for between $5,000 and $10,000 – 10 times what they’ll cost in a year or two.
The bigger issue is the psychological need to always have the latest gadget or be at the cutting edge. Ask yourself whom are you trying to impress.
3. You have the constant need to upgrade
Fewer than half of all iPhone users hang onto their smartphones until they stop working or become obsolete. Most want to upgrade as soon as their provider allows it – usually every two years. A small percentage upgrades every year whenever a new model is released.
While spending a few hundred dollars on a new phone every other year might not hinder your retirement plans, it could be a symptom of a bigger problem. The constant need to upgrade your technology, your car, and even your home can be a big drain on your finances.
Nearly three in 10 homeowners get the urge to move every five years, and 14 percent actually want to move every year.
The solution: The same buy-and-hold approach that you take with your investments can also apply to your major purchases. The Globe and Mail’s Rob Carrick suggests a 10-year rule for homeowners to combat the odds of a housing crash and to save on transaction fees.
Extending the life of your purchases, even by a year or two, can free up cash to pay down debt or save for retirement.
4. You treat credit card debt as a fact of life instead of a hair-on-fire emergency
Life can be expensive but there is no excuse for using credit cards to support your lifestyle. Despite what your friends or coworkers might say, credit card debt is not a fact of life. This may come as a shock but you can save up in advance for a vacation or new kitchen appliances.
The solution: Nothing can ruin your finances quite like high-interest credit card debt compounding every month. Stop everything and assess your income and expenses. Cut discretionary spending, put any savings plans on hold, and throw every cent towards your highest interest debt until it’s gone.
Related: Debt avalanche vs. debt snowball (or when math trumps behaviour)
5. You use low interest rates as an excuse to finance depreciating assets
Borrowing to invest can make sense when your expected return is greater than the cost of the loan. But it’s a mistake to take out a loan – even at today’s low interest rates – to finance consumables and depreciating assets.
Common reasons to take on debt today include weddings, vacations, furniture, and vehicles. A home equity line of credit can provide flexibility to pay for big purchases, but the habit of borrowing from your future self to pay for today’s consumption is a major retirement killer.
The solution: You need a financial plan. Most of us can wrap our heads around saving for retirement but we struggle prioritizing and funding our short-term goals. A good plan helps you identify what’s important in both the immediate and distant future and steers your savings towards the appropriate goals.
Put a dollar amount and a timeline on your goals and start saving. Trust me, it’ll feel great to pay for your next vacation or big-ticket purchase in cash.
6. You’re too complacent
Doing nothing is often the best course of action when it comes to a volatile stock market, but financial inertia can cost you in other ways. Some of us can’t find $50 a month to save for retirement, yet we pay $15 a month or more in bank fees, won’t drive half-a-block to save money on gas or groceries, and don’t bother returning items of clothing that don’t fit.
Worse examples of complacency are when people don’t take advantage of their employer matching RRSP program, don’t shop around for a better rate on their mortgage, or continue to pay high fees on their investments.
The solution: Sometimes we need a wake-up call or major life event before we start taking our finances seriously. Once you see how much complacency is costing you that’s usually enough to motivate you into taking action.
7. You put off retirement savings until a later that never comes
“We’ll start saving for retirement once we’ve paid off our credit cards-line of credit-mortgage.”
There are so many priorities competing for your hard-earned dollars. Sadly, retirement savings is easy to put on the back-burner while you deal with more immediate needs like a big mortgage, two car payments, a new trailer, and some expensive seasonal hobbies. Retirement is far away and you can save later, right?
If you’re already killing your retirement dreams with the previous six habits then later might never come.
The solution: There’s a reason why ‘pay yourself first’ is such a powerful savings tool. Money is automatically whisked out of your account before you get a chance to spend it. Like some kind of magic you barely notice and are somehow able to live on the rest.
8. You keep your long-term savings in cash
You actually managed to get some money from your chequing account into your RRSP or TFSA. The problem now is that it’s sitting in cash – you actually need to take the next step and buy an investment such as a mutual fund, ETF, stock, bond, or GIC.
This is a uniquely Canadian problem as investors have nearly $75 billion in excess cash sitting in their portfolios.
The solution: Whether it’s risk-aversion or analysis paralysis, you need to take action and get your retirement savings working for you. Speak with a financial planner who can help you make sense of your investment choices and risk tolerance. Read books, blogs, and magazines to try and educate yourself about investing and how to build a portfolio.
A good place to start is with the model portfolios listed on the Canadian Couch Potato blog.
Final thoughts
It’s true, we do plenty to sabotage our own retirement dreams. The good news is that it’s never too late to take control of your finances and start saving for retirement. Start by fixing bad habits that have a negative effect on your finances.
Save enough and you can retire on your terms.