Are you making your bank’s shareholders rich?

Most financial advisors will sell you actively managed mutual funds.  But here’s the rub.

Academic studies on mutual funds all point to the same conclusions:

  1.  There’s no evidence that people can consistently choose the top performing funds ahead of time.  Nor is there evidence that an advisor can “trade” funds for you to improve what a low cost, buy and hold, diversified approach would provide.
  2. Actively managed funds are expensive—subsidizing the financial service industry nicely, at the expense of investors.
  3. Choosing the advice of ratings companies like Morningstar doesn’t help.  Their four and five star funds don’t perform any better (going forward) than their 2 and 3 star funds.

But doesn’t all of that professional research help?  Sadly, no.

In each of the below scenarios, a huge fund company (RBC financial) put their professional heads to work, buying and selling stocks and bonds for the RBC fund family.  Watching the latest news, interest rates, and political sparring, the analysts at RBC did their dipping and diving to make money for their clients.

But you can beat RBC’s collective brains on your own. 

How?  By diversifying your account among different asset classes, and keeping costs low. 

If you’d like a balanced portfolio of stocks (added risk, higher returns) and bonds (lower risks, lower returns) you could follow an allocation like Harry’s.  It’s very well suited for someone in their 50s who will soon be drawing on that money for their retirement.

Roughly half of Harry’s portfolio is comprised of Canadian bond indexes, and the rest is divided between Canadian stock indexes, a U.S. stock index and an international stock index.

Harry doesn’t have to be a pro.  He just needs a level head and to maintain his target allocation of stocks and bonds over time.

So, how would Harry have fared against the best and brightest at RBC?

He opened his account in August, 2008.  And he used low cost index funds—which tend to be the pariahs of the financial service industry (when you buy them, advisors don’t make much money)

Thanks to, we can see how each of RBC’s equity categories would have performed: the Canadian equity, U.S. equity, International Equity and their balanced fund–and we can plug in the dates from August 2008 to March 16, 2010 to see how they compared to Harry’s account.

Harry’s money hasn’t had to contend with management fees totaling about 2.5% per year.  So it was easy for this non finance professional to come out thousands of dollars ahead of the RBC professionals. 

His money (as of March 16, 2010) has only increased 3.6%, but RBCs Canadian equity, U.S. equity, International equity and its balanced fund would have fallen well short of Harry’s account.

Over this time period, the top performing fund was the balanced one—which is similar in asset allocation to Harry’s account, having both stocks and bonds.

But it’s safe to say that if Harry had invested in this fund from August 2008 to March 16, 2010, his account would be roughly $25,000 behind where it currently is: …read more

If Harry had the misfortune to deal with an advisor who put him more heavily into equities (fewer bonds, more stocks) Harry would have had a sadder tale to tell.

The dipping and diving of RBC’s U.S. equity fund managers would have created nothing but stress for Harry: … read more

Their Canadian equity fund would have hit Harry in the pocket: …read more

And their international fund—despite the nimble trading of the pros behind it—could have reduced a grown man to tears: …read more

As of March 16, 2010, Harry’s account is up 3.6% (from August, 2008).  It’s nothing to write home about, but it beats the high-cost professionals who try racing Harry, while they carry backpacks full of rocks.