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Advice for my little brother

14K views 36 replies 16 participants last post by  OntFA 
While it's not my first choice, TD e funds are a good option if you're looking for a hassle-free and convenient way to start investing. But they're not just for small investors. Their fees are low enough to keep accumulating in those funds for a very long time. Remember that you can reinvest without additional direct or opportunity cost which is usually not the case with ETFs.

Don't get too hung up on the 4% real return calculation. Sounds like you've been doing some reading since that's a common figure that is tossed around. Ultimately, what you can realistically expect will depend on how much risk you're willing to take and, in turn, how you end up dividing your assets between stocks bonds and cash - and more importantly how much you fiddle with the strategy over the years.

Many talk about fees but investor behaviour can easily have a much larger impact on your bottom line returns.
 
OntFA, if not TD efunds, what are good alternatives? I'm thinking of a family of no-fee cheap diverse index mutual funds, but maybe there are other alternatives for a beginning investor to start building a portfolio? hmmmm.... what... ?
I almost always recommend that beginning investors start with nothing more than a basic balanced fund. One fund, nicely diversified. Reasonable fees.

If starting with a more modest amount of savings, one of the best options is RBC Monthly Income which you can buy from any branch of RBC Royal Bank. They will try to sell the fund of funds or RBC portfolio funds but best to just stick to the cheap simple stuff.

If he's a bit more daring and has a few more bucks (at least $5k), he can do even better with a fund like Mawer Canadian Balanced RSP fund which can only be had for a $5k minimum if bought through a brokerage account (like TD Waterhouse Discount or Scotia iTrade). Now, it's as easy as that but understand the irony in that it requires a great deal of knowledge and experience to know that this is the best way for a novice to start. And it may well be a good option until his savings reach well into the six figures. I'm not kidding. Lots of people do a lot worse than a good cheap balanced fund.

You don't know me but take this advice seriously.
 
- given his 30+ year investment horizon, he should consider investing in 80 - 100% equity vs. bond funds for the next couple of decades. I personally would choose 100%.
I would never put any client heavier than 70-75% in stocks. Just part of the uncertainty of investing in stocks. Holding just 1/4 in bonds or cash is a good hedge against stock market uncertainty.

Maybe:
25% TD Canadian Index
25% TD U.S. Index (the cheaper vanilla version, not the Currency Neutral one)
25% TD International Index (ditto, the non-Currency Neutral version)
12.5% TD European Index
12.5% TD Japanese Index
You've illustrated exactly why I suggested a simple balanced fund. Europe and Japan are already heavily weighted components of the International Index fund so adding to those two just tilts the portfolio much more heavily in favour of overseas stocks. If you are going to ignore the advice to have something in bonds, at least simplify the stock side by simply using the first three funds on your list.

If you want to add a bit of spice to the portfolio, add CIBC Emerging Markets Index Fund since emerging markets are not included in the International Index fund. So, a sample mix would be something like 34% Canada, 33% U.S., 25% International, and 8% Emerging Markets. Just a suggestion but it shouldn't be any more complicated than that.

- initially he should put his investments into his TFSA room with any excess going to an RSP account. The reason for this is that the TFSA will be his emergency fund, since there's no penalty for withdrawing from it (except my wrath if he withdraws for anything but a genuine emergency!). After his emergency fund is built up, he'll preferentially put into RSP, then TFSA, then unsheltered account. (I know there's some risk holding somewhat volatile equities in an emergency fund, but I think we'll accept that risk, given that hopefully he'll never have to use it.) (Just thinking a bit more, maybe there's a case for something a little less volatile for an emergency fund, say one of the balanced funds people have mentioned earlier. But I don't think we want to cripple his potential for growth by going to a savings account or money market fund for this.)

hmmm.... not sure about the mechanics of sheltering TD E-funds in TFSA's (from my previous mutual fund experience, I know it's no prob to have both RSP and non-RSP accounts) Will the TFSA work too? If anyone can comment on this, let me know, thanks, otherwise, we'll be learning as we go...[/QUOTE]
 
Personally I'm not a big fan of balanced mutual funds.
Good, 'cause my advice wasn't for you.

Some of the reasons include high mers, lack of transparency etc etc. Also if you are a DIY investor with a discount brokerage account you don't get any discount per say for picking your own mutual funds.
You are making generalizations. I did not recommend the "average balanced fund" in this thread. I recommended the brother consider one of two funds depending on the amount of money available to invest. One charges 1% and the other charges 1.2% in fees with no cost to buy and the ability to fully reinvest income distributions without further cost + the ability to do a pre-authorized investment.

For somebody who is 34 years old IMHO they should have at least 35% fixed income in their portfolio.

What about a basic portfolio such as 35% xiu ---35% xbb---15% xsp and 15% xin?
So, you want to tell a 34 year old who has just started making enough money to invest and has never touched a mutual fund let alone stocks (which is what ETFs are) to just start buying ETFs? You wouldn't suggest this if you had an appreciation for the anxiety people feel in doing this. And this is relevant if they're out there on their own doing this.

People who frequent these forums are not your typical Canadian investor, and certainly not your typical Canadian DIY investor.
 
IMHO investing in etfs isn't scary at all.
For you and most on this forum, no it isn't. And I'm not saying it makes a lot of sense but you're out of touch with the average Canadian investor. It's intimidating and it's foreign territory. It is what it is, whether you choose to believe it or not.

As a matter of fact mutual funds are starting to become obsolete. ETFS are the way of the future. Even BMO just came out with a new series of ETFS today as a matter of fact.
That's an overdone theme. Mutual funds aren't going anywhere. Their growth may slow but their not going away. And ETFs are a small and growing part of the industry and that's the reason BMO entered the game.

With a lot of these etfs you can get synthetic drips as well. Therefore it might wind up not costing him any extra money in commissions either?
Yes but how will he do monthly purchases in ETFs without it costing him a fortune. And you can't invest an exact amount in an ETF. You have to instead buy some number of shares and you get to invest whatever that costs, which usually leaves some extra cash that has to sit on the sidelines. But even if he does the broker sponsored DRIP, that's another phone call that has to be made in order to set it up and perhaps a form(?).

I'm also not suggesting he invest in complicated sector etfs. IMHO xiu, xbb, xsp and xin are basic and popular etfs that are in fact easier to understand then the average balanced fund.
Really? Ever try to explain the mechanics of creation units to a novice investor? How about how the price you pay for the ETF can be lower or higher than the value of the underlying investments? Can you even tell that the price you pay is above or below NAV at the precise time of the trade?

ETFs are not as simple as you make them out to be. They function very much like mutual funds but there are more moving parts than people realize. The bull/bear ETFs are a case in point. Everybody complains about these things and it seems to be mainly because nobody has read the prospectus.
 
Uh. Why would you have any more struggle in explaining ETF creation units than you would in explaining MF units?
Uh, it's easy to explain that when a client invests in a mutual fund, the fund issues more units to sell to new investors and buys back units from investors who want some/all of their money back. In all transactions, you always trade at a price equal to the value of the investments held in the fund. Simple and easy to understand.

ETFs don't work this way. I'll give you a test, if you choose to take it. How would you explain, in plain English, how creation units facilitate in and out flows and how arbitrageurs keep the price as close to NAV as possible even though you risk paying more on buys and getting less when selling. And before you chalk this up to a useless nuance this speaks to the risk of trading at a discount or premium - and it can be significant with ETFs investing in less liquid securities.

While reminds me of the other myth with ETFs. Try explaining the liquidity risk with ETFs and how it doesn't matter how many ETF units trade.

I don't personally think that ETFs are conceptually more difficult to understand than are MFs and, in fact, I would probably argue that ETFs are intuitively more simple to understand.
Conceptually, in broad terms, you're right. But there are issues that clients need to be familiar with if you're going to cover your *** (a reality for those of us with a license and an obligation to not only know your client but know your product). Look, this doesn't make ETFs inferior or anything like that. But let's face it, they are structurally more complex than mutual funds - and that has pros and cons.

But back to the original issue....it's not a matter of who's better but which is most suitable to the beginner investor. You have to admit that it's MUCH easier and convenient to walk into your local RBC bank branch, drop a cheque in front of the account manager, fill out the application, and invest in the RBC Monthly Income fund than it is to buy ETFs.

Somebody mentioned streetwise funds, which is fine but it costs the same as the two funds I suggested early in this discussion. Compare that with the time to set up your DIY brokerage account, get online access, search for symbols, and start trading (and do so without getting sucked into the loser's game of starting to buy penny stocks and the IPOs the broker will advertise and the Agriculture ETF and the double short natural gas ETF and so on), investigate the DRIPs and sign up for those, etc. It's a cake walk for savvier investors but it's a lot of work for beginners, not to mention intimidating.

If all you've ever done is buy GICs and savings bonds, jumping straight to stock trading is too big of a jump unless the person in question has really ramped up on their knowledge. Kind of like moving out of your parents' home. For a lot of people, they should rent for six to twelve months to ease into the responsibilities and financial burden of buying a home.
 
Folks, we've gone off track. Understand that I'm not trying to create some mystique about it being complicated. For crying out loud I gave out free advice to the poster to buy something I could never make money on so WTF about that is complicated and self serving? Not one part of it.

In the interest of the poster's brother, I simply suggested that buying a mutual fund is simpler and more convenient - and hence more likely to be implemented - as compared to the relatively more involved brokerage/ETF solution. I didn't say the ETF route was bad or inferior - just not suitable for the majority of beginners.

What you all are missing are the practicalities of the situation and choosing a solution that not only has a higher likelihood of getting done, but getting done properly and with minimal maintenance. And it's an option that has a relatively lower chance of luring a novice investor into costly mistakes.

I agree that you'll have to rebuff the bank branch's sales tactics so staying focused on what you want is paramount. But then again, if opening a brokerage account is so easy, RBC Direct Investing will allow anyone with $10k buy the RBC Monthly Income in D series form with annual fees of just 0.84% which makes my argument even more compelling in my opinion.

And once more, if anyone wants to take me up on it, I'll reiterate my challenge from above...

me (from above) said:
I'll give you a test, if you choose to take it. How would you explain, in plain English, how creation units facilitate in and out flows and how arbitrageurs keep the price as close to NAV as possible even though you risk paying more on buys and getting less when selling. And before you chalk this up to a useless nuance this speaks to the risk of trading at a discount or premium - and it can be significant with ETFs investing in less liquid securities.

While reminds me of the other myth with ETFs. Try explaining the liquidity risk with ETFs and how it doesn't matter how many ETF units trade.
 
First of all only 1 in 10 advisors are licensed to sell etfs in the first place. Therefore the majority of diyers who buy etfs do so without an advisor.
Where'd you get that stat? Any stock broker can sell an ETF. I would have thought that stock brokers make up more than 1 in 10 advisors.

IMHO for very liquid etfs such as the xiu the price always trades pretty close to nav.
Yes, and the majority of XIU investors are institutions. But ETFs with a higher retail base like CPD and XCB have real liquidity risks and higher likely mispricings.

You should give diy investors more credit. With the advent of the internet all the information that is available to the advisors is also available to the general public as well.
More information does not make for a more informed investor or provide greater insight. More information, one could argue, adds to confusion because of information overload.

Just to repeat. Setting up a discount brokerage account is not that difficult. Most investors who just stick to a couch potato etf portfolio should be fine.
How many people do you know, squash, that actually use ETFs the way they were originally intended - eg with just a handful of funds covering the major asset classes a la couch potato? I haven't met one person yet. I haven't met anyone who could not resist the Ag ETF or the China ETF or the short ETF or whatever else is drawing attention and sounds real sexy. And that stuff destroys returns more than an extra 1% fee ever will.
 
According to Preet's website 75% of financial advisors cannot sell etfs. http://www.wheredoesallmymoneygo.com/should-mfda-advisors-be-allowed-to-sell-etfs/

Jon Chevreau wrote an article in the National post over a year ago which was reproduced on the Barclay's ishare website that claimed only 10% of advisors can sell etfs. I can't find that article at the moment.
Okay, I'm clearly wrong on this one but the definition of advisor is clearly quite broad as it includes everybody licensed to sell some type of investment. But fair enough on the 10%-25% of advisors can sell ETFs.

IMHO a lot of retail investors invest in the xiu as well. The xiu has almost $9 billion in total assets.
But when something is a matter of fact, opinion doesn't matter. And it is a fact that the majority of assets in XIU belong to institutions, which came as a result of the take over of the old TSE index participation units funds (i.e. ETFs).

Personally I read an article on the moneysense website talking about the etf couch potato portfolio. I'm sure I'm not the only investor who follows this investing mantra.
If you and MoneyGal truly invest like this and in nothing else, you are truly unique. I'm shocked that you don't buy bank stocks, other dividend paying stocks/trusts, no sector ETFs, no long/short ETFs, and nothing other than broad based funds. I am genuinely shocked if this is the case.

Inexpensive TD Managed Index-e portfolio's are also readily available.

[snip]

More detail below on one of the TD Managed e-Series Index Fund portfolios from their web site.

TD Managed Index Balanced Growth -e

[snip]

MER: 1.27% as of June 30, 2008.
That's a good suggestion FeeOnly. I'd think that the ING Streetwise funds are even more convenient to purchase, however, and they have a slightly lower fee of 1% - as do my two suggestions for that matter.
 
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