Whoa. I would never say you could relate to mutual funds as being "like a GIC." Mutual funds (and any equity investment) carry the risk of loss, while guaranteed products provide a guaranteed return.
I know what you are trying to communicate - you are saying the OP should not expect returns above fixed income on the MF part of her portfolio. However, the fixed income portion of her portfolio has a lower bound on returns, and the MF portion does not.
"...you could basically treat your investment as 100% in GICs
as far as long-term results are concerned."
I wasn't talking about their respective risk profiles; but I think we both understand what each of us was trying to communicate.
I'm no fan of mutual funds, however, the potential advantages of MFs include:
- low-cost diversification for small amounts (relative to buying individual stocks)
Diversification has never been a benefit. This concept has been sold to Canadians by the fund industry. Diversification is a negative (and a very large negative at that).
"I was suffering from my chronic delusion that one good share is safer than ten bad ones, and I am always forgetting that hardly anyone else shares this particular delusion." - John Maynard Keynes, 1942
"The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it." - Warren Buffett, 1993 Chairman's Letter to Shareholders
"I have owned one stock since 1969, two since 1988 and one I started buying in 1986 or so. That's my portfolio. Six stocks. I once owned 17, but that was way too much." - Philip Fisher, Forbes
- a convenient way to implement portfolio tilts (i.e., value, small-cap)
All investing is value investing. If you aren't value investing, then you're probably just fooling around.
"The whole concept of dividing it up into 'value' and 'growth' strikes me as twaddle. It's convenient for a bunch of pension fund consultants to get fees prattling about and a way for one advisor to distinguish himself from another. But, to me, all intelligent investing is value investing."
- Charlie Munger
Disclaimer: my wife and I also own approximately 6 stocks and we have absolutely destroyed the returns of any diversified holding over the last decade. The discrepancy is so huge that speaking about diversification as an advantage is laughable to us.
- active trading at low cost and with no time investment and little knowledge investment (relative to implementing an active trading strategy yourself)
"Active trading" is the second huge negative in investing. It is not a benefit. Active trading coupled with divsersification is the best way to ensure mediocre to poor results.
"All intelligent investing is value investing - to acquire more than you are paying for. Investing is where you find a few great companies and then sit on your ***. - Charlie Munger at Berkshire Hathaway's 2000 Shareholder Meeting
"Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell."
- Warren Buffett
"Charlie and I decided long ago that in an investment lifetime it's too hard to make hundreds of smart decisions. Therefore, we adopted a strategy that required our being smart - and not too smart at that - only a very few times. Indeed, we'll now settle for one good idea a year. (Charlie says it's my turn.)" - Warren Buffett
With regards to "little knowledge investment", if you plan to "invest" (and I use the term loosely) with "little knowledge" then your expectations should be the same as your knowledge level, that is, that your returns will be similar to a GIC (with a higher risk profile to compensate for your lack of knowledge).
- A way for investors with small portfolios to work with a licensed advisor
If by "licensed advisor" you mean sales person, then you are correct. However I don't see how this is an advantage.
When I started with $3000 10 years ago, and even now with over $1.2M I still don't want to work with a licensed advisor. The game is already tough enough without somebody else manouvering me into higher frictional costs. I performed far better with $3000 than any licensed advisor could have done for me in the last 10 years.
However, for some people, retail MFs are going to be their choice, because they are the most available and the most accessible (it is actually very difficult to find an advisor to implement an ETF portfolio for accounts of less than $250K).
It is not in the advisor's best interest to recommend the lowest cost option or work with individuals with smaller amounts of capital (e.g. $3000).
For those people, who either can't or won't DIY, mutual funds provide a way to get exposure to the market. Yes, at high cost, and yes, I think costs matter (I think they are the number one factor in determining long-term investment success, actually). But even I sometimes buy milk at the convenience store.
We would need to agree to disagree. Half my investment income is not worth the 'benefit' of using an advisor/sales person to "get into the market". You don't need to be a DIY investor to buy a low-fee index fund - you just need to be aware that they exist.
Capital + lack of financial knowledge + financial advisor = fee gravytrain for decades to come.
Having said that, I don't blame financial planners for doing what they do. I have friends who are financial planners and they do very well for themselves. If someone wanted to recommend a profession for their children,
I strongly recommend financial planning. Living off the fees from your customers is a very nice way to go, especially when you will have these customers for decades; it's like having the income of a surgeon without the liability.