Globe and Mail Strategy Lab: Why I’m An Index Investor

Canada’s national paper (The Globe and Mail) asked me to create an indexed portfolio that they will track for the next 12 months.

It’s called the Investment Strategy Lab.

A collection of smart investors are offering a variety of investment strategies, and our respective performances will be tracked by the newspaper.

Each of us will be writing a weekly column for the Globe and Mail as well. 

Read our introductory articles





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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24 Responses

  1. Great article as usual Andrew! Too bad they wouldn't run the contest for more than a year. That's short enough for some wild things to happen! I guess those in your classes will know more than Globe & Mail readers.

    By the way, I wonder if one reason people avoid indexing is that they just don't know that the simple average return is pretty good. They might be used to seeing actively managed funds that underperform, or poorly-managed portfolios that earn less returns than the funds in them, and think you have to beat the market or you're losing money.

    • Thanks Value Indexer. And I think you're right bout people's perceptions. But as we both know, average returns doesn't actually equate to average returns does it? It's a lovely paradox!

  2. Barry says:

    Agreed with the above, a year is pretty short in the scheme of things, even Warren Buffet went for 10 years with "The Long Bet" against Protégé Partners LLC, a New York fund of hedge funds. I'm surprised you got on board, unless your confident that you'll do okay, or the others will do poorly in a short term competition?

    Was there any reason why you went with an emerging markets index also, or was it just for the volatility you may need in the comp?

    Will be an interesting 12 months either way :o)

    Regards

    Barry

    • Hey Barry,

      I don't think any of the writers are really thinking of it as a short term competition. That's just the paper's way of generating interest. I got on board because I'm hoping my articles provide a nice educational platform for people. As for the emerging market index, I figured we'd truly give readers the world. But as you can see, I didn't put much into the emerging markets.

      • Barry says:

        Hi Andrew,

        You have an investors mindset though :o)

        As per examples in your book and people chasing the next hot thing, I'm guessing many people won't see the long term strategy, only the results at the end of 12 months?

        A 12 month competition, like a stock market game they have here on the ASX is near on gambling or dart throwing.

        Its a hard sell to the sheeple to say my strategy is the one you should subscribe to, if you get severely thumped in this comp?

        Regards

        Barry

  3. DIY Investor says:

    Interesting competition. I'd like to see an aggressive market timer, technical analyst, and tactical asset allocator in the contest as well. For the latter two, as far as I can tell, there is no evidence on how they do – especially at the advisor level. There is of course a lot of evidence that the market timers get slaughtered. Last year was a case in point as evidenced by hedge fund returns. With the U.S. Treasury in a stalemate over the debt limit, Europe imploding, China slowing and U.S. economic data weakening who, in their right mind, would invest? Indexers of course!

    I agree with the others that 1 year is a short period and won't reveal a lot. It won't, for example, show up the importance of costs and the fact that superior returns aren't consistent for the active investor.

    Anyways it should be fun!

  4. Ken says:

    Hi Andrew,

    I'm curious, why you picked VEA and VWO, instead of picking VXUS to cover both? Over a long period, I suppose it wouldn't matter, but wouldn't picking VXUS show readers how simple index investing really is?

    Regards,

    Ken

    • BC_Doc says:

      Hi Andrew,

      I'm also curious– why not skip the mix of equity ETFs and go with a simple two fund portfolio, VT-N and VSB-T? VT-N would avoid any under weighting or over weighting of countries and regions.

      All the best,

      BC_Doc

      • You are right B.C. Doc. It would avoid global capitalization risk. That said, it doesn't mean that going with VT would necessarily improve profit potential because the aggregate expense ratio is lower by splitting it up, as I did.

        I believe my version is cheaper by about 10 basis points overall. The emerging market index brings it up beyond the (roughly) 0.15% I would pay with VEA, but still keep the overall expense ratio below 0.35, which is what VT charges.

        Having said all that, is my option better? I would be a fool to suggest that it is, because I can't see the future.

        Your suggestion/option is every bit as valid.

        Cheers,

        Andrew

        • BC_Doc says:

          Thanks for your reply Andrew.

          In practice, I've also put together my version of VT using VTI and VEU based on actual global cap weighting. Last time I checked, using VTI and VEU saved me 10 basis points versus purchasing VT. The bid-ask spread generally runs a penny per share on VTI/VEU versus 4 cents per share on VT. Using my combination of VTI/VEU, I'm saving myself about a $1000 per share based on a $1M portfolio– not small change.

          In the ideal world, I would use VT (for simplicity sake), but the $1,000 per year savings isn't small change!

          Thanks,

          B.C. Doc

  5. sgibbs says:

    As usual Andrew, great article.

    Thanks.

    Stu

  6. Gary Pastor says:

    Hello Andrew,

    I read the above article on September 20th (Thursday), bought your book Friday, read it Saturday, and re-allocated the cash balances in all of my accounts according to your index strategy today (Sunday). My orders are placed for Monday.

    For those with a TD WebBroker account, you will find the process of buying the index funds for your account quite straightforward and simple. I had no troubles at all.

    The one question I do have with respect to returns is the way TD reports the yields of the funds as follows on the stock summary page after you search it:

    TD International Idx Currency Neutral-eTDB905 – Yield 0%

    TD US Index – eTDB902 – Yield 1.32%

    TD Canadian Index – eTDB900 – Yield 1.92%

    TD Canadian Bond Index – eTDB909 – Yield 3.2%

    Can we assume these are not accurate, and don't truly reflect the expected returns closer to the 8-10% range?

    Gary.

    • Hi Gary,

      Those are current dividend yields. Remember that stock market profits come from two sources: dividends and capital gains. Capital gains are represented by the rising stock prices within the index, and dividends are the cash payouts that companies within the index give out to shareholders.

      Also keep in mind that there's no such thing as a steady 8-10%. The markets will go up, down and sideways. But over an investment lifetime, you will likely average that annual range.

      Cheers,

      Andrew

  7. Andre says:

    Hi Andrew,

    I read your articles on The Asset Builder website and via The Globe. I know you advocate passive investment strategies and would like to know what you think of the Permanent Portfolio Strategy (H. Browne).

    Thanks,

    André

  8. barry says:

    Hi Andrew,

    This series of the Globe and Mails Strategy Lab started on a Monday, are updates weekly or sporadic from each contributor??

    Regards

    Barry

  9. twentyone says:

    what are the main difference between your way of investing and permanent portfolio?

    i understand that you portfolio has a weight of bond that is your age (or minus 10 for aggressive investor), and the rest is spilt between local index and world index.

    on the other hand, permanent portfolio has equity index, long term bond/bond index, gold and cash. all spilt equally into 4 (25% each).

    i have done some reading on cons of PP, and gold was one thing they talk about. another is that 50% of PP are not really growth assets.

    i would like to have your views on this if you dont mind.

  10. twentyone says:

    i went on reading and found someone's comment which made sense to me. PP is sort of a free size shoe and does not cater to people of different risk group. for example, a young investor with more risk tolerance will find PP too conservative, whereas a retiree will find that portfolio too risky.

    • That's right. And of course, it uses gold, which mine doesn't. Gold itself doesn't grow long term. It's even lower now (inflation adjusted) than it was in 1980. So the Permanent Portfolio relies more on automatically timing gold in a mechanical sort of way. That said, I do think it's a good altenative strategy. If you read my articles on Michael O'Higgins (Canadian Business) you will read about something similar.

      • twentyone says:

        I have yet to come across that article. I am still new to your website and has only read part of your website, but is slowly catching up as I cover more posts. I will keep a lookout for that article. Once again, thank you for your views and prompt reply.

  11. Vips says:

    Hi Andrew,

    I have been reading your blog for some time and am highly impressed by the way you are sharing your financial knowledge with all of us…

    I have a question for you – I am moving into TD e-series funds for RESP account for my kids(and also probably for my RRSP as well) as per your suggestions from time to time(again because of the low cost of e-series funds)…

    Now that Vanguard is here in canada as well and they provide even cheaper ETF's then TD's e-series, would you think that it makes more sense to go with them instead? Do you foresee this little fee difference adding to a significant gain in the long term?

    Thanks again for the excellent blog..

    • Hi Vips,

      There are advantages to owning Vanguard's ETFs, but they are also much less convenient for smaller accounts, regular small deposits and the reinvestment of dividends. You'll pay commissions for each ETF purchase. With the e-Series funds, there's no commission to pay, so you can add small sums automatically, monthly, without commissions. When (if) you end up with more than $80K or so, it would make sense to likely switch it over. But while the account is small, it makes less sense to go with the ETFs.

      Cheers,

      Andrew

  12. Gregory Wyatt says:

    HI Andrew Hallam:

    Always find the index vs active managed debate most interesting. I have been a pension/insurance consultant with my own firm for 30 years. Noting the returns on the RBC Funds chart in the January 29th Globe, I could see why active management is not cool at all. In my Pension/Group RRSP programs that I manage thru Manulife I note returns in my 10 recommended funds that have the 10 year average at 9.4% for the Manulife Monthly High Income Fund #5132, 15.3% for the Fidelity Canadian Large Cap #7141, 9.9% for the Jarislowsky Fraser Canadian Equity #7241, 6.8% for the Manulife Balanced Fund #2003 and 7.0% for the Jarislowsky Fraser Canadian Balanced #5241 to name a few. These percents are after management fees which range from 1.4% to 1.85%. I do in fact offer index funds on the packages our office manages, but with returns like these why bother and of course no one does.

    I can only assume the retail investor may be some better with index investments, but since most of the above are also retail products they kind of knock index from its pedestal.

    Incidentally, I get paid the same whether I uses index vs active, so the earnings argument for a broker makes no lure one way or the other.

    Nice article,
    Greg Wyatt
    Pitt Meadows, BC

    • Hi Gregory,

      If you were recommending these funds in 2004, that’s super, your investors did well. But that’s the hard part: figuring out which funds will do well in the future, not the past.

      Cheers,
      Andrew

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