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Weekend Reading: Bad Investment Advice Edition

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:

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!

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7 Comments

  1. Steve Bridge on August 30, 2019 at 1:37 pm

    Great post, Robb, as always! So much misinformation to be fought out there…

    • Robb Engen on August 31, 2019 at 10:53 am

      Thanks Steve! It’s a constant battle, as you know.

  2. Geoff Burke on August 30, 2019 at 1:47 pm

    I’ve been following Dan Bortolotti and the Canadian Couch Potato for about a decade and he has proved time and time again to be the steadying influence each time some new investing idea (aka “bad investment advice”) has had me reaching to click the “Buy” button.

    Sorry to hear he has decided to stop producing new episodes of his podcast, but hopefully he’ll keep updating us with his wisdom via the Canadian Couch Potato website.

    • Robb Engen on August 31, 2019 at 10:54 am

      Hi Geoff, I agree that Dan and his CCP brand has been a great resource for investors. He did allude to some changes with the website as well, so we’ll have to wait and see what happens there.

  3. Mariea on August 30, 2019 at 3:21 pm

    Hi Robb, I really appreciated this article. I wish I knew how to refute the argument that investing the bulk of your money in something like the CIBC Monthly Income Fund (that pays you 6 cents per share and supposedly invests broadly in the market but mostly in Canada) is not as smart or wise as sticking with low fee ETFs.

    I’m not that financially literate and would appreciate you explaining this to me again. I did have my money in that fund for a few years and I could never ever figure out the fees they were charging nor how much I was netting out after their fees. I have most of my portion of higher risk money in a robo advised ETF fund and I like the clear concise statements that tell me how much I’ve earned every year. Can you explain again why funds like this CIBC fund is a bad idea if you are looking to pay low fees vs rate of return?

    Of course this CIBC fund looks more ‘legit’ because you do it with your local advisor at your local CIBC branch, but someone has to pay for that office, and if you think it’s CIBC you’re nuts. It’s probably coming from these ‘fees’.

    • Robb Engen on August 31, 2019 at 11:03 am

      Hi Mariea, great to hear from you!

      The CIBC Monthly Income Fund has a MER of 1.47%. Yes, it offers a yield of 6% – which sounds attractive to investors – but the problem is how much of that yield is made up of what’s called Return of Capital?

      An income fund should be paying distributions from the interest and dividends it makes on its investments. And there might even be some capital gains passed along as well.

      But Return of Capital can also mean paying investors back with their own money (if there’s not enough capital appreciation from its investments to meet its distribution targets).

      Also, look at this performance chart on Morningstar. The CIBC Monthly Income Fund is the blue line, which trails not only the market but also most funds in its category (likely do to higher fees): https://www.morningstar.ca/ca/report/fund/performance.aspx?t=0P0000707U

      • Mariea on September 1, 2019 at 8:50 pm

        Hi Robb, Thanks so much for the explanation! That really does help me. We have finally sold the house and are planning the move to Greece in December. Very excited! I’m also very happy with your plan for me and how my portfolio is doing with wealthsimple and eq bank. Thanks again!

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