Canadian Couch Potato godfather Dan Bortolotti recently posted the returns for his three model portfolios. Like my two-ETF portfolio, which returned 14.06 percent, Dan’s model portfolios had a banner year in 2017. Here are the results for the most aggressive versions of each portfolio:
- Tangerine’s Balanced Growth Portfolio – 9.5 percent
- TD’s e-Series Funds – 11.8 percent
- Three-ETF Solution (ZAG, VCN, XAW) – 12.3 percent
These are excellent returns that reflect just how well the Canadian, U.S., and International equity markets performed in 2017. If you’ve recently looked at your portfolio’s performance and found the results lacking, you might be contemplating a switch to indexing.
Indeed, I’ve received many emails this week saying something to the effect of, “after reading about your 14 percent returns I’m convinced I need to make the switch to indexing.” This has me concerned for a few reasons.
Let me be clear: I don’t want you to change your investing strategy just to chase past performance. The beauty of indexing is that you take what the market gives you, minus a very small fee. My portfolio has benefitted from the incredible run that the stock markets have been on over the last few years. That could change at any moment.
We could see a correction this year, for example, and then I’d feel terrible that you jumped on the indexing bandwagon only to see your portfolio go down in value! As a passive investor, you have to be prepared to take some losses when markets are down and have faith that they will come back (as they always have) over the long term.
So, if you’re looking to get out of your actively managed portfolio, I’d much rather see you switch to indexing because of the lower fees (likely a fraction of what your mutual funds charge, right?). Say you have a $300,000 portfolio of bank-managed mutual funds. An average of 2% MER will cost you $6,000 every single year. Compare that to an indexed couch potato portfolio at 0.50% MER, which will only cost you $1,500 per year, and you’d save $4,500 in fees every year.
Over time those fees drag down your investment returns and can cost you well over $100,000 throughout your investing lifetime. Yikes! It’s fees, not past performance, that is the best predictor of future returns. The higher the fee, the lower the return (and vice-versa).
Finally, if you’re feeling any angst over becoming a DIY investor, I’d strongly encourage you to consider using a robo-advisor. You’ll get all the benefits of a indexed portfolio, plus the robo will take care of your asset allocation and rebalancing. Just contribute regularly and the robo will do the rest, in exchange for a small fee.
Must read: A Brain-Dead Easy Way To Invest
Don’t get me wrong, I’m thrilled that so many of you are considering a switch to indexing. Just make sure you’re doing it for the right reasons – to save on fees, not to chase past returns. Low fees = higher returns over the very long term, but over the short term your mileage may vary.
This Week’s Recap:
On Monday I shared my portfolio rate of return for 2017 and for the last three years.
On Wednesday Marie looked at becoming retirement ready.
And on Friday I explained how artificial intelligence can help you find and save more money.
Weekend Reading:
An optimistic read on why 2017 was the best year in human history.
Here’s the always wise Ben Carlson with 10 things investors can expect in 2018.
A cool story from Andrew Hallam on the embarrassing side of Warren Buffett’s million-dollar bet:
“I think I could beat Warren Buffett in a footrace. I might even beat him in a burger-eating contest. But if he issued an investment challenge, I would turn my tail and run.”
Barry Ritholtz answers the question of whether stocks are pricey, but says the real question is, relative to what?
Worried about your pension? Why a ‘copy-cat’ annuity might be right for you.
Morgan Housel with the thrill of uncertainty:
“There have only been three times in the last century when stocks almost exactly doubled in a decade. Returns were nearly identical during these three periods, down to the basis point. But the path and emotions that got you there couldn’t be more different:”
Michael James says measuring stock-picking skill is tricky business.
How to find cash for your RRSP contribution? Tap other investments to come up with the money to invest.
What happens to your spouse’s TFSA if they die? Jason Heath says it depends on whether you’re their beneficiary, a successor holder or neither.
Finally, Canada Revenue Agency tweaks the tax return process for Canadians with low or no income. Here’s what you need to know:
Have a great weekend, everyone!
