Imagine walking up to your financial advisor with your newfound knowledge on the superiority of index funds over actively managed funds.

In short, you want to swap your actively managed funds (which pay your advisor very well) for passively managed index funds (which don’t pay your advisor very well).

But she says, “Oh, indexes don’t perform well during market downturns”.  Your advisor might look calm on the outside, but the questions you’re posing are making her sweat.  But you’re impressed by her composure and “knowledge” so you wander away,  and your account stays as it was—in funds that pay the advisor well.

What the advisor doesn’t do, is mention that a responsibly allocated investment account is diversified with stock funds and bond funds.  And that you can own stock indexes, as well as bond indexes. This will dramatically help you during a stock market downturn.   If you’re 40 years old without a pension coming your way, a strong rule of thumb is to have 40% of your money in bonds, or bond funds.

How would a portfolio of indexes–with 40% in bonds–have fared from August 15, 2008 to May 22, 2009, compared to a portfolio of actively managed mutual funds?

The starting date wasn’t chosen randomly.  A friend of mine switched his account from actively managed funds to indexes last August–and I’m revealing his account here.

Compared to actively managed mutual funds that have a minimum of 40% in bonds and 60% in stocks, this diversified portfolio of indexes has performed spectacularly.  And it would also be far more tax efficient than any of the actively managed funds below.

Do you want to see how he did?

You can even compare it with your own portfolio to see how your investments measured up.

From August 15, 2008 to May 22, 2009, how did a balanced portfolio of index funds compare with the best Canadian balanced mutual funds I could find?  We know that the world’s stock markets dropped significantly during this time period.

The indexed portfolio above, representing 40% bonds, and 60% stocks (including Canadian, U.S. and other international representation) dropped just 8.3% during this time period—August 15th, 2008 to May 22, 2009.

Compared to actively managed mutual funds that have a minimum of 40% in bonds and 60% in stocks, this diversified portfolio of indexes has beaten all I could find.

And it would also be far more tax efficient than any of the actively managed funds below.

Each performance percentage I provide below includes the time period from August 15, 2008 to May 22nd, 2009.

MD Balanced
as of May 22, 2009

The MD balanced fund dropped 15.6% compared to the indexed drop of 8.3%.

 

CIBC APRS Bal Growth RSP Port.-659
as of May 22, 2009

Here’s another “apples to apples” comparison, with CIBC’s flagship balanced fund this time:  down 16.9% since August 2008, compared to the indexed portfolio drop of 8.3%

 

RBC Balanced
as of May 22, 2009

RBC’s balanced fund (again, a stock and bond blend) is down 15% since August, compared to the indexed portfolio drop of 8.3%.

 

G Beutel Goodman Cdn. Balanced-A
as of May 22, 2009

The Investors Group Balanced Fund (again, in this market, the balanced funds have been, by far the best performers—other than straight bond funds) has had the best performance of the bunch.  We’re narrowly ahead of this one, as it’s down just 8.5%.  That said, if you sold any of it before a 5 year period was up, you’d pay a stiff penalty.  It’s called a “Back end loaded fund”—very shifty stuff.

 

Manulife Core Balanced Fund
as of May 22, 2009

And below, here’s Manulife’s Core Balanced Fund—down 25% since August compared to our indexed portfolio, down just 8.3%.

 

Acuity Canadian Balanced
as of May 22, 2009

The Acuity Balanced Fund is down 12.3% compared to the indexed account drop of 8.3%.

 

AIM Canadian Balanced
as of May 22, 2009

The AIM Canadian Balanced Fund is down 9.2% since August, compared to the indexed portfolio drop of 8.3%.

 

Caldwell Balanced
as of May 22, 2009

The Caldwell Balanced Fund is down 13.6% since August, compared to the indexed portfolio drop of 8.3%.

 

Invesco Trimark Core Cdn Bal Cl
as of May 22, 2009

The Invesco Trimark Balanced Fund is down 9.5% since August, compared to the indexed portfolio drop of 8.3%.

 

TD Balanced Growth
as of May 22, 2009

The TD Balanced Fund is down 14.1% since August, compared to the indexed portfolio drop of 8.3%.

 

If a financial advisor had added any other stock based fund to a portfolio (to compliment a balanced fund) then the results would have dragged their portfolio down a lot further.

Over the long term, no financial study refutes the superiority of index funds over the actively managed funds that most people are sold–especially when weighing in fees and taxes.  All studies report to the superiority of indexes. Even short term, as you can see above, it’s not an easy ride for mutual fund managers.

So who do you want to buy a Mercedes for?  You or your financial advisor?

…continue to track the progress of Harry’s Account from the right menu