The Eight Year Canadian Investor’s Itch

Today I went running with a couple of new friends, Joey and Marilyn. 

Entering Victoria, B.C.’s Elk Lake trails, we started a conversation about investing as we pattered along the wet leaves.  As it turns out, they use the same financial advisor that I started my investment journey with, two decades ago.  But they’re starting to feel the seven year itch, wondering if they should ditch their advisor.  How are their investments performing?  Let’s have a look.

Joey and Marilyn are paying roughly 2.5 percent a year in hidden annual fees…just as I used to, with a company called Investors Group.

During our run, I expounded on the merits of indexed investing, and how investors stand the greatest statistical chance of success when investing with indexes, rather than expensive financial products (like those sold by Investors Group).

But what if Joey and Marilyn had only listened to one part of my discussion?  At some point, they may have drifted off to something more mentally scintillating—like where the ducks go in the winter.

What if they didn’t hear what I said about “low cost indexes” and they bought expensive indexes instead?

That would be a shame.  There are plenty of banks in Canada that are selling index funds that they should be ashamed of.  Many of them cost nearly 1 percent a year.  You can find indexes that cost 1/5th of 1 percent, if you know where to look.

Let’s assume that Joey opened an account of expensive index funds eight years ago, and Marilyn opened an account of actively managed funds with Investors Group on the same day.  Marilyn’s investment funds had fund managers who arrived at work each day to trade stocks (and/or) bonds—trying to find great businesses, ride economic trends, and make money for Marilyn.

Joey, on the other hand, bought a group of indexes from Toronto Dominion Bank.  And he paid high fees for them.  He still paid half of what Marilyn was paying, but Joey was still getting fleeced.

Whose account would have done better over the past eight years, Joey’s or Marilyn’s?

Presume that Joey and Marilyn each diversified their money equally between the Canadian stock market, the U.S. stock market, the International Stock Market and the Canadian bond market, putting $10,000 into each sector, back in November 2003.

Here are the following funds that they would have likely bought, given the above scenario of global diversification:

Marilyn’s Investment Group Funds

Joey’s TD Index Funds

Investors Group, Canadian Equity A

TD Canadian Index

Investors Group, U.S. Equity Fund A

TD U.S. Index

Investors Group, Templeton International

TD International Index

Investors Group, Canadian Bond Fund

TD Bond Index

 With $10,000 invested in each of the funds below, in November 2003, this is what they would each be worth on November 22, 2011 

Investment Category

Marilyn’s Actively Managed Funds

Joey’s Index Funds

Canadian stock market

$12,716

$17,172

U.S. stock market

$7,488

$9,884

International stock market

$9,486

$10,186

Canadian bond market

$14,110

$15,071

Total Account Sizes

$43,800

$52,313

 

Over just eight years, Joey’s indexed account would have beaten Marilyn’s Investor’s Group account of actively managed funds by $8,513.

A couple of things to keep in mind:

  1. If Joey bought cheap, e-Series index funds, the difference would be even more significant.
  2. If this money were held in a taxable account, Marilyn’s actively managed funds would have generated heavier relative tax liabilities, relative to Joey’s funds (indexes are much more tax efficient)

If you’re looking for further information on index fund investing, you could order a copy of my book, Millionaire Teacher.  It’s currently Canada’s #1 stock market investment book, according to Amazon.

 And it ranks among Amazon’s top 3 investment books in the United States.  You won’t be disappointed.







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andrew hallam

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 (Wiley 2011) 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.

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19 Responses

  1. Drizzt says:

    I believe you work in Singapore. Over here we only have ETFs to work with and they do not have an expense ratio as low as what you mention. What are your advice for Singaporean investors?

  2. Hi Drizzt,

    You can buy ETFs in Singapore with very low expense ratios. My U.S. ETF has an expense ratio of 0.09% and my international has a expense ratio of 0.17% (less than the examples I gave in this post). You can buy them through virtually any Singapore brokerage. I bought mine through DBS Vickers.

  3. Robber Baron says:

    Hi Andrew. As usual, enjoyed the article. I'm American working in Korea. TD is exclusively for Canadians. Unfortunately, no good ETF investment options in Korea, only pricey funds and single-stocks. So that means dealing elsewhere. There are online services for Americans, of course, but many require US-presence to open an account or demand US presence for transactions (I just got shunted from ShareBuilder as they determined that the bulk of my activity was conducted from Korea, which is true.) It seems Zecco allows overseas activity, and you don't have to be a US citizen to open an account. Still very cheap at $4/trade. The expense is transferring money to the US.

  4. Shawn says:

    First of all, Andrew I love your blog. I read it daily. Right after I enter your web address and press enter I am always hoping there is going to be an update.

    ATTN: Robber Baron

    Robber, I am a Canadian living in Korea teaching English. I couldn't agree more with the problem you stated above about transferring money home. What method/bank have you found to be the cheapest? I bank with KEB (Korean Exchange Bank) and opened an acocunt that I can transfer/wire money home through the ATM without having to deal with a Bank Claim Rep. I pay about $25 in commission to KEB each transfer. (Then my bank in Canada takes a small fee aswell). Have you found any better way to send money home for less than the $25 KEB fee?? Which bank do you bank with? How are their fees?

    • Robber Baron says:

      Shawn, you are getting Robbed!

      Other banks charge $10-12 for a bankwire. (I use Kookmin but each year you can only register with a single bank, so look around before your first 2012 bankwire.) The clearinghouse in North America takes another bite — up to $25. And some banks / credit unions charge a receiving fee.

      There are options. The less legal, but not illegal, way is to give your Korean bank ATM card to a trusted one back home, who pulls from your bank on a Canadian ATM (international banking exchange rates, very favorable, plus an ATM fee of maybe $5, depending on the ATM, no fee in Korea). They put that cash into your Canada bank account, where you can write checks, arrange automated transfers, do e-banking, etc. However, it has happened that the bank put a freeze on the ATM card I sent my mom. Workaround, open a new account (at a different bank?), get two new ATM cards (1 must be an "international"), send the new intrnt'l card to Canada . . ..

  5. chad says:

    Hi Andrew,

    I am a Canadian teacher in the Philippines and have followed the advice from the Canadian Couch Potato, which is the same advice I found 5 years ago from the Benjamin Graham's "Intelligent Investor" and promptly ignored.

    I am currently purchasing the TD e-series Index Funds through dollar cost averaging weekly and adding to weak position as you suggested.

    Question: Do you think I should switch over to ETFs with a lower MER? I would have to give up dollar cost averaging weekly and switch to monthly purchases, but I get low commissions with Questrade ($4.95) and Interactive Brokers ($1).

  6. Robber Baron says:

    Alternatively, get an "international" credit card locally. Be careful, some charge annual fees (e.g., Samsung). Depending on your employment & visa status and history in country, they may require a deposit (essentially, it's a debit card). Be sure it's something you could use in Canada. Now use it! Online shopping and payments. (Many student loans can now be paid this way.) You can pay through PayPal, etc. (You may need to fudge the billing adress, this avoids some card confirmation systems that can be extremely frustrating.) Some financial services (not many) will accept payments by card, perhaps with an added surcharge. You can also follow the ATM model–Not for cash advances–expensive–but to let that trusted other pay for things, then they "pay you back" with local currency.

    Be sure to pay the card balance in full each month.

  7. Shawn and Robber,

    You guys rock! Thanks for sharing this information on my blog, with your comments. We're getting thousands of readers, and many of them are in similar situations to you guys. Thanks for sharing this stuff—it's really helpful!

  8. Shawn says:

    Robber, thanks so much for taking the time to respond in such detail. Your thoughts and comments will be very useful. I didn't anticipate an answer with so much great info. Thanks again!

  9. Gerry Born says:

    Andrew,

    Congrats on the success of your book. I enjoy your posts, and I plan on getting a copy of your book soon. As you probably already know, we in the U.S.A. have our share of fee bloated annuity products in our 403b retirement plans. I used to blog a lot about 403b fee abuse, but the subject was making me a very negative person. Here is a trip down bad memory lane:

    http://www.403bboondoggle.com/search/label/AIG%20

    http://www.403bboondoggle.com/search/label/John%2

    Keep up your excellent work,

    Gerry Born

  10. Hi Chad,

    If you're a Canadian living overseas, I recommend that you close your Canadian based account ASAP. You need to be concerned about Revenue Canada's residency issues. You may have filed as a non resident, but if you keep your money in Canada, you will be looked at as a guy on a holiday instead. Fly to Singapore and open an account there. Here's a link:

    http://andrewhallam.com/2010/09/expatriate-canadi

    Then wire the money monthly to Singapore.

    • RobberBaron says:

      We Americans, on the other hand, don't face this problem as reidency is based on "physical presence." However, using an IRA helps. No domestic earnings hassle this way, but for the profits on investments outside IRA (caused because you exceed maximum allowable annual contribs to an IRA). Not all brokers will accept IRA accounts, and not all stocks, will be allowed by some brokers. Still, it is a consideration.

  11. chad says:

    Hi Andrew

    Thanks for the advice, I recently contacted a Canadian tax accountant who specializes in overseas taxes. According to him, there was a change in the Canadian tax law in 2008 or so that states that non-residents can hold stocks and mutual funds without incurring any taxes. It is a way to encourage investment into Canada. Of course, you cannot hold RRSPs.

    • Hi Chad,

      You can hold RRSPs as a non resident, but you can't contribute to them. Keep in mind that you will pay 25% on capital gains from anything derived in Canada. You may or may not threaten your residency status and have to pay Canadian income tax, but you will have to pay Canadian capital gains taxes on your investments. There's a much leaner option, which I mentioned; although, it's not as convenient.

      • chad says:

        Hi Andrew

        I did some more research and according to this article from KPMG, I think it is saying that as of 2010 that non-residents are exempt from capital gains tax. Let me know if Im interpreting this incorrectly.

        .

  12. Thanks for the link Chad. I read through it, but I did not see how this eliminates non resident capital gains taxes on publically traded companies. It appears to deal with real estate, shares in private corporations (stocks and bonds are public), and "substantial" shareholder positions in holdings where the owner owns 25% or more of the company, and then trust interests were included as well. Again, I don't see it affecting public, traded companies, funds or ETFs. It would be nice if this were the case, but to me, it doesn't look like it is.

    Canadian real estate

    · property used in carrying on a business in Canada

    · shares of private corporations resident in Canada

    · shares of private non-resident corporations that meet a two-part asset and value test

    · substantial shareholdings (i.e., 25% or more owned by non-arm’s-length persons) in public corporations

    · interests in partnerships that meet a value-based test

    · certain trust interests, including capital interests in Canadian-resident trusts.

  13. H Balaji says:

    Dear Andrew,
    I can’t thank you enough for educating morons like me. I have invested in Zurich Vista only to learn through the posts on your site that the policy cannot continue if you are transferred to the US. You are not allowed to even keep it in suspense and have to cash it after paying a huge penalty which in my case will be 50% of what I have paid.
    It is the same with standard life investments as well and something that my FA did not mention. Luckily I am within the 14 days window and will cancel it losing some hard earned money in the process.
    I sincerely hope others do not make the same mistake and exercise due diligence when it comes to investing.
    Best wishes
    Balaji

    • Balaji, I’m so glad you’re going to be able to get out unscathed!

      Cheers,
      Andrew

      • H Balaji says:

        Dear Andrew,
        I managed to wriggle out of standard life one time investment withour losing anything.
        With Zurich Vista, just praying that I don’t lose a lot when i redeem but at least have stopped paying further premiums.

        The most important thing for people to know is that, even if there is a remote possibility of working in the US in the future, please stay away from all these products as these companies will automatically cancel and pay you after holding the early redemption penalty which could run into thousands. Please take a hard look and decide like what Andrew has said in all the posts.
        Andre, I owe you a nice chilled beer for saving people like me!!
        Best wishes
        Balaji

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