Weekend Reading: Managing Investor Expectations Edition

The reason I put so much emphasis on low investment fees is because it’s one of the few key areas that investors can control (the others being asset allocation, rebalancing, and savings rate). Yet most investors focus on the area they cannot control – their portfolio returns.

While it’s reasonable to expect investment returns in the 4 – 8 percent range over the very long term, the actual distribution of those returns can vary widely. Indeed, over the two decades investors have seen annual returns ranging anywhere from a 30 percent loss to a 30 percent gain. That’s a wide distribution of outcomes, yet the end-result over that 20-year period for a balanced portfolio of Canadian, U.S., and international stocks and bonds is about 5.80 percent.

Part of an advisor’s job is managing investor expectations. Beware of any advisor promising returns of any kind in the short term, especially the old “protection on the downside” advice.

As much as I preach about ditching your expensive mutual funds to move to a low cost portfolio of index funds, whether that’s through a robo-advisor or on your own with a discount broker and a one-ticket balanced ETF, I am extremely aware that we have been in a bull market for the last 10 years. When the inevitable market correction happens, and it will, investors will panic about their returns and look to blame someone.

Switching to a low cost, passive investing approach is not a panacea that will protect you from market downturns. By definition your portfolio will deliver market returns, minus a very small fee. Sometimes, like in late 2018, the markets will dive and your portfolio will lose money.

But here’s one investing truth you can take to the bank: A low fee, globally diversified portfolio of ETFs will beat a high fee actively managed investment approach nine times out of 10 over the very long term. And since you cannot identify the one outlier in advance, you can be confident that your investment performance will beat 90 percent of active strategies.

For further reading, Canadian Couch Potato blogger and investment advisor Dan Bortolotti skillfully answers a question about managing investor expectations in this excellent MoneySense piece.

This Week’s Recap:

I was incredibly honoured to join the selection panel this year for MoneySense’s 7th annual best ETFs in Canada series. We looked at Canadian, U.S., International, fixed income, and all-in-one ETFs from a universe of 833 funds, narrowing down the list to rank the top 25. Each panelist also included a “desert island” pick – a single ETF we’d feel comfortable holding for the long term.

Over on the Toronto Star I reviewed the three best hotel rewards programs in Canada.

Back here on Friday I offered a step-by-step guide on how to transfer your RRSP to Wealthsimple.

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Weekend Reading:

Wealthsimple’s Money Diaries series features interesting people telling their financial life stories. This edition highlights Philadelphia Flyers goaltending legend Bernie Parent, who entered the NHL making $20,000 per year.

Here’s a must read money series that features Abigail Disney (granddaughter of Roy) explaining what it’s like to grow up with more money than you’ll ever spend:

“If I were queen of the world, I would pass a law against private jets, because they enable you to get around a certain reality. You don’t have to go through an airport terminal, you don’t have to interact, you don’t have to be patient, you don’t have to be uncomfortable. These are the things that remind us we’re human.”

Morgan Housel on why luck is the flip side of risk: You cannot understand one without appreciating the other.

Here’s a tough question: If you had $1 million in 1919 (100 years ago), what could you have invested in back then to preserve its purchasing power until today?

Mike Moffatt wrote a very interesting post on the mass exodus out of Toronto – what he describes as the number one issue for the province over the next 20 years.

Preet Banerjee is back with another episode in his Learn About Investing series, this time with a look at investment funds:

Million Dollar Journey blogger Frugal Trader updates his financial freedom goals with an impressive $48,200 in dividend income.

Michael James talks about the idea of staying in the workforce to pad his retirement savings. I hear this a lot of my place of work and I’ve determined, as Michael did, that nobody has regretted taking the opportunity to retire early.

Why is it that people only seem to pay attention to personal finance when it elicits a harmful emotion? Ben Carlson says it’s because the topics tend to be too boring to talk about otherwise.

Here’s Dan Bortolotti on how to use ETFs in your child’s RESP. I’ll admit I have not done the math on this but I’m sticking with TD’s e-Series funds for my kids’ education savings – simply due to avoiding trading fees on our regular monthly contributions.

Rob Carrick shares a turbo-charged but dangerous way to earn more credit card reward points.

Finally, a retirement professional shares the secrets of a successful retiree. I love the focus on health, people, pursuits, and places.

Have a great weekend, everyone!