Retirement Planning Seminar for United World College Teachers in Singapore – Part 2

United World College Talk – Part II.

Yesterday afternoon, I gave a seminar outlining how much money a person would need to invest to reach a desired amount of future income for their living expenses, upon retirement. 

There were loads of variables, of course, but setting objectives and working towards them is always recommended.  What’s the trite expression?  If we fail to plan, we plan to fail.

At the end of the session, I mentioned that I’d be showing the attendees (next week) how to beat the vast majority of investment professionals, at the investment game.  I hinted that I was about to expose the financial service industry’s dirty little secret.

A gentleman approached me after the session and asked me how much time I spend on my own investments each month, researching what to buy.  When I told him, “about 15 minutes”, he smiled and said, “then I’ll see you next week.”

Well, it seems that I exaggerated a bit.  It takes about 4 minutes a month. 

Are you interested in how I do it?

First, we have to understand how the stock market and its products work. 

Like any asset, the stock market’s level is based on supply and demand.  When people are hungry to purchase stocks, the demand/supply table tips and stock prices rise.  It’s that simple.  It always has been that simple.

Second, when the stock market rises, say, 8% in a given year, it means that the average dollar invested in that market made 8% that year.

Half of the dollars that were invested in the market would have made more than 8% and half of the dollars in the market would have made less than 8%.  Simple stuff.

As a result of that irrefutable math, there’s something you might not have thought of.  Most of the money invested in the stock market is in the form of unit trusts (mutual funds) index funds, pension funds, university endowment funds etc.  These make up the vast majority of stock market invested dollars.

So here are some questions, and think about them before answering…

Question 1:  If the stock market made 8% in a given year, what return would the average professionally managed stock market dollar have returned in the stock market that year?

The answer to that question is 8%.  If the stock market made 8%, then the average professionally invested dollar would have made the same return.  No matter what the average professional did to bounce money around, trying to take advantage of stock market “opportunities” the average dollar invested by professionals in the stock market would have made 8%—because the money in the market is a direct result of the supply and demand component created by the buying and selling of professionals.  They have so much money in the market (unit trusts, mutual funds, endowments funds, pension funds) that they, as an aggregate, make up the market’s return.  Again, simple stuff.  But this leads us to Question 2.

Question 2:  If the stock market made 8% in a given year, would that mean that the average professional would have made 8% with their stock market investments?

The answer to that question is “No”—they would have made less. Here’s why:

The average professional investor (this is the person who actually runs the unit trust or mutual fund) incurs costs, when buying and selling stocks.  Those costs detract from his or her returns.  Then, some of the assets go towards the financial companies’ owners.  For example, Fidelity is privately owned by the Johnson family, and the family makes money based on a percentage of assets collected by investors.  If you invest with Fidelity, you are paying the Johnson family a percentage of your assets every year.  It’s a hidden cost.

Other fund companies are publically traded, so money also gets skimmed off the assets of the funds they run, put into the companies’ coffers and reported to owners (shareholders) as company profits.  As a mutual fund investor, you’re not an owner of the company.  The owners of the company take your money directly out of your funds, without you seeing it.  This “taken” money is justified as part of the company’s “expense ratio”.

Other layers of costs come from investors’ assets:  some of that expense ratio goes towards advertising (or in the U.S., there’s an additional, separate fee called a 12B1). 

And a further layer of costs derived from the expense ratio is taken to compensate the broker who sold you the fund.  And yes, brokers often choose funds based on how well they will be compensated.

Question 3:  So why does the average mutual fund (unit trust) underperform the results of the stock market, even though the average fund’s stock market money earns the same return as the stock market?

Fees.  After fees, the average professional investor is destined to lose to the stock market’s performance.  If you could just buy every stock in a given stock market, you would beat the vast majority of investment professionals by doing nothing at all.  You wouldn’t have to watch investment news or follow the economy.  You’d be destined to beat roughly 85%-90% of the professionals.  In a taxable account, you’d beat far more than that.  Trading (which occurs within unit trusts/mutual funds) generates higher tax consequences for taxable investors as well.

Question 4:  Don’t some investment professionals beat the stock market as a whole?

Looking in the rear view mirror, you can bring up charts indicating that about 15% of professionally managed funds beat the stock market average over the past 15 years.

But studies show that most of those that beat the averages over the past 15 years, tend to badly underperform the market over the next 15 years.  Nobody has determined how to pick “market beating” funds ahead of time.  An investment salesman may claim that he/she can do it.  But they can’t.

And when looking at financial service organizations, keep in mind that some of them are destined to do very poorly, comparatively, thanks to their additional fee structures.  Watch out for variable annuity products.  It might be tough to find anyone, anywhere, saying anything nice about them…other than a salesperson.  Don’t take my word for it.  Do some online research on them.

Question 5:  So what have I missed out on, by not getting my share of stock market returns?

I’ve been investing for 21 years.  During my investment lifetime, we have seen markets rise and fall, and rise and fall.  But how much has the stock market in Canada gained since 1990?  From 1990 to 2011 it has gained roughly 500%.  The U.S., Australian and British markets have had similar gains as well.

If your stock market money has not gained 500% since 1990, you probably know why.

The financial service industry has skimmed fees off the top, and they’ve promised you that they can dance around, find great funds for you, and make you a killing.

But the vast majority of people who go into the money management field don’t go into it to change the world.  A look at the Forbes list of richest people reveals that it’s the single most lucrative profession.  Check out America’s list for an example:

Question 6:  How do I get my share of stock market returns, without getting taken to the cleaners?

Your best odds of success come from owning every stock in a given market.  You can simulate that by purchasing products called broad (or total)  stock market index funds.  They’ll provide you with the highest statistical chance of success.

Question 7:  So do you just buy a single index fund, and be done with it?

It’s almost that easy.  I own 3 index funds:

  • My first index represents the Canadian bond market.  For stability, this money is more dependable, doesn’t grow as fast, and has no exposure to the stock market.  I’m Canadian, so I want exposure to “home dollars”
  • My second index represents a broad collection of U.S. stocks (it’s a low-cost U.S. stock market index)
  • My third index represents a broad collection of international stocks (it’s a low cost international index)

A broad stock market index owns a massive number of companies.  It’s cheap to own.  Nobody is paid to “trade” the stocks within an index fund.

Question 8:  So how much time does it take to make an investment decision at the beginning of each month?

It takes me about 4 minutes.  My decision is a mechanical one.  Once I show you, you’ll know exactly what I’m going to buy each month, even before I tell you.

And there’s one statistical inevitability:  No matter where the stock markets go, I will beat the vast majority of investment professionals.  That’s academically irrefutable.

You can easily build a diversified account of stock and bond indexes.  It’s a piece of cake.

And doing so will allow you to say, “No” to excessive fees, empty promises, and underperformances.

For more on index funds, check out what the experts say here

And if you want to see how some progressive employers are protecting their employees from the industry’s self-serving conflicts, have a look at what Google is doing here:   

In my next post, I’ll tell you which index I’ll be buying this month.  It’s not rocket science. 


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Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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11 Responses

  1. internaxx special deal for andrew hallam readers

  2. lovely leverage says:

    Hi Andrew,

    Great way to eliminate un-systematic risk and reduce systematic risk.

    Looks like its greater the risk, greater the reward for you!

  3. Thanks LL,

    I am definitely a conservative investor though. I follow the general rule of having my bond component roughly equating to my age. But that certainly does provide plenty of dry powder when markets go south. I do enjoy buying during panics.

  4. Brilliant, as usual Andrew. We'll take some of these (er, all) tips and utilize them immediately.

    I would also like to suggest you look into the GASP captcha plugin (no, I am not the creator or affiliate) as it is a simple check box and much more friendly than those garbled letters!

    Thanks for continuing to post your thoughts and ideas about how you invest – they are truly helpful for countless readers.


  5. Thanks for your kind words Sustainable!

    And thanks for the tip, with respect to the plug in.



  6. Larry Cuozzo says:

    Hi Andrew,

    I enjoy visiting and reading your comments, but I wanted to argue that there may be a place for a mutual fund, if used properly and sparingly. I will give you the scenario and ask you to tell me what you think.

    I'm Canadian (high school teacher too!) with 2 children. I"ve set up an RESP for both of them that allows me to contribute $2500/year per child and the Government of Canada provides at 20% top up grant. Not a huge sum of money but it can add up over the years. I've decided to purchase a low cost mutual fund offered by Jarislowsky Fraser Ltd which charges .75% MER. The problem I have with buying a Canadian index is the heavy weight (79%) in just 3 areas in Canada (financials, energy, materials) you get by purchasing a XIC. The other problem is it's hard to get proper diversification when you do not have a lot of money to invest.

    Jarislowsky Fraser, who have been in business for over 40 years have an excellent safety record of avoiding the big blowups and still beating the index. I've provided a link to their performance and also to show how they were able to lose significantly less than the market did in 2008/2009. When most funds and indices were down 35-45%, they were only down 23%.

    Any suggestions for this scenario?


    • Hey Larry,

      I think the fund you chose is a good one, based on the low fee and their discipline, which I determined from their low turnover. I think this is how mutual funds are supposed to be: charging a respectable fee instead of gouging investors. With an expense ratio of just 0.75% annually, it's a heck of a lot lower than the average Canadian fund, at 2.4%. Thanks for sharing that. A number of Canadian readers might be interested.

      As for me, I don't actually own a Canadian stock index, but if I did, I wouldn't mind the extra volatility it might provide, based on a focus of three sectors. I realize that this is mentioned, academically, but over the past 30 years, it hasn't really proven to be much more volatile than the U.S. S&P 500 index.

      That said, I think your fund selection is a sound one. You bought it for all the right reasons.

  7. Great questions with equally great answers Andrew!

  8. The Dividend Ninja says:

    Nicely Done!

  9. ethical investor says:

    missed this seminar but read the book in a day – great read! thanks for the sage advice for some illiterate teachers.
    however cannot find any mention of ethically-invested ETFs on your site. For a UWCSEA audience these could be very attractive and I know many are offered in uk and other markets. The ones I can find however charge the higher fees that you stress are killers of good returns. Is it possible to find a ETF that tracks ethical companies without high fees?

    • Ethical Investor,

      My trouble with ethical funds is this: whose ethics are they built on? I had a friend who stood a bit high and mighty, based on her ethical mutual fund. I researched the companies that the fund owned. And when I showed her what I found, she was floored. They included companies that owned sweatshops, built automobiles and aircraft engines, created ground destroying fertilisers (used only in developing countries!) sold soft drinks, fast food, awful processed food, tested on animals, made plastics, had manufacturing polluting plants that weren’t up to European or North American code…situated in Indonesia or India. So, my view on ethical ETFs is that they’re a money making marketing ploy. Just staying away from oil, gas, and alcohol doesn’t cut it. If you are truly serious about investing ethically, here’s what I think you should do. Select your owns stocks, after painstaking research. Ensure that you own stocks throughout the world. And research them to the hilt. Then buy and hold. And make sure, for diversification, that you own at least 30 of them. Also, don’t buy newbies. Ensure that your companies have been around for at least 10 years, that they have low debt levels, and that the companies are making business profits.


  10. ethical investor says:

    thanks andrew, yes i was coming to this conclusion having looked at some of the ‘ethical’ funds available…they just did not screen effectively enough….I wanted my choices to be very positive rather than just avoiding. I’m wary of selecting individual stosks afer reading your book, but I guess the same message of practicing diversity and long term holding still applies to a well-chosen basket of companies. Will have to do some h/work! Presume buying these individually mean less ‘management’ fees than a fund too. Thanks

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