Canada -The World's Easiest Place To Beat Investment Professionals?

Canadians have a great, international reputation.

We tend to be polite, easy-going and accepting.  And our financial service industry knows it. 

According to a 2008 study conducted by Ajay Khorana, Henri Servaes, and Peter Tufano (published by Oxford University Press) Canadians pay management expense ratios on actively managed mutual funds that, when coupled with the costs of load fees, amount to an average of 3 percent a year in total costs, estimated over a 5 year period.

Yes, there are Canadians who still pay load fees (sales commissions to buy funds) and redemption fees to withdraw.  Our greatest strength–our easy-going affability–becomes our greatest weakness when we accept investment costs that would have many other country residents shuddering in repulsion. 

But how does this affect you, fellow Canadian?

In an investment climate such as ours, beating the investment professionals at their own game couldn’t be easier.  You can spend less than an hour a year following your investments; you never have to read the financial news; you never have to watch investment based television;  and you can crush the investment returns of the folks who make their living by investing money for good, honest, unaware Canadians.

Back in 2008, I told my friend, Harry, the very same thing:

He was a retiree with $288,000 invested in actively managed Canadian mutual funds.

“Listen Harry,” I said, “If you create a balanced account of index funds, you’ll beat the vast majority of Canadian pros, without any trouble at all.”

So he took me up on it, opening a brokerage account with QTrade and building a portfolio of indexes, through a series of exchange traded funds.

Harry didn’t want to do any work.  He just wanted to diversify his account across the U.S. stock market, the Canadian stock market, the International stock market and the Canadian bond market.

Now, let’s be honest.  August 2008 to August 2011 resulted in some pretty poor stock market returns.  We had the biggest stock market decline in many years to deal with, so it’s not likely that anyone “knocked the lights out” during this volatile period.

To make matters worse, Harry even withdrew some of his money.  He was working on an airplane at the time, and his costs were running higher than he expected.  From 2008 to 2011, he withdrew roughly $83,000 from his account.  And he didn’t always do it during opportune times (like when the markets had enjoyed a good run).  Sometimes, he took money out when the markets were down.

Harry might not have a financial education, but he isn’t stupid.  When the markets were low, and he needed money, he didn’t give in to his emotions and sell his stock indexes.  Instead, when stock markets were low, Harry sold his bonds to pay for his airplane’s costs.

On one occasion, in 2009, he even rebalanced some of his portfolio, selling some of his bond index to switch some of the money to his stock indexes.

I told Harry that he would beat the pants off most of Canada’s investment professionals—mostly because of the high costs associated with Canada’s mutual funds.

From the time Harry opened his account (August, 2008) to the beginning of August, 2011, how did Canada’s actively managed mutual funds perform?

Because Harry has a balanced account with stocks and bonds (roughly 50% of his portfolio is in bonds) we can look at what the balanced mutual funds at Canada’s big five banks would have earned during this three year period.

Keep in mind that these funds charge very high investment fees; however, they are run by professionals who can rebalance their funds’ holdings, while trying to take advantage of economic climates.  Every day, these funds have trained professionals who arrive at work, ready to research stocks and bonds, while doing the very best they can for their investors.

Let’s see how well they performed, from August 2008 to August 2009:

–0.02%:  RBC Balanced Fund  

+7.09%:  CIBC Balanced Fund

-0.15%:  Scotia Canadian Balanced Fund

-0.06%:  TD Balanced Growth Fund

-2.22%:  Bank of Montreal NB Balanced Fund

Oh my….those results aren’t very good.

Let’s see how Harry did, with his exchange traded funds:

Harry’s account grew by 14.7% during the same time period. You can see his account’s annual results below:

Note that Harry removed money from his account every year. During falling markets, this would normally be a recipe for disaster. As you can see on the above table, he had $288,651.99 invested in August 2008 (when he opened the account) but he withdrew exactly $20,000, sometime between 2008 and 2009, to pay for his airplane’s costs.

By looking at the “Net Invested” column, you can see the money that he was removing from his account.

But Harry never sold stock indexes when they were falling.

How much time did Harry spend on his investments? Less than one hour a year.

His current holdings are below.

No, you might not think that his portfolio is “perfect.” That isn’t the point.

The point I’m making is that the account is diversified, cheap, and Harry wasn’t foolish enough to sell stocks when they were low.

Harry’s withdraw rate, of course, isn’t sustainable. If he keeps removing money from his account, he’ll soon run out. But he doesn’t care. His wife has a pension, and as I type this, Harry is flying the skies above Mission, British Columbia, in his own airplane.

To conclude….

If Canadians continue to accept high cost investment products, Canada will likely earn an interesting distinction: as the easiest place in the world to beat investment professionals.

For more information on how Canadians can buy index funds and ETFs, check out my book, Millionaire Teacher.