Be Careful where you get your advice

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Lately I have seen a lot written, as well as attended many industry meetings, about ETFs. It is interesting what you read in the newspaper on the matter.

  1. The morning that I am writing this I read a column stating that since only 25% of certain mutual funds beat their corresponding index, mutual funds are no good - just buy ETFs. The comparison did not take into account the costs of the ETFs, which can be much higher than you expect. As I continued to read I realized that the writer decided what the article would state and then looked for statistics to prove his point. He failed miserably.In a past article I showed that a good investment advisor studies the markets, meets with any portfolio manager they are using and finds these consistent winners. The writer misses the point that a good portfolio manager will adjust their portfolio to control risk for their investors. The writer isn’t there giving well researched advice as to what markets are right at that time and he doesn’t know the risk profile of the investor. An unlicensed and not regulated columnist contorting the facts to prove an ill-informed opinion is extremely irresponsible. He is, through his opinion, giving the public investment advice. Many that follow his advice will be extremely disappointed.

  2. Before the drop in the markets of 08/09 a certain news reader on a business channel often stated that ‘investing is so easy you don’t need an advisor’. Now that the market has dropped the whole station now makes sure they want the investor to work with an advisor and not act on the information just given on their station. Those irresponsible remarks for the years before the correction caused a lot of self-investors major losses. The new statement to use an advisor is obviously a result of these hurt investors. There seemed no end to the calls I got from investors who grew to believe his statements and were turning to professional advice now that they had already been destroyed.

  3. A firm that runs ETFs stated at a meeting that a conservative basket of their ETFs earned about 10%. They did a study of ETF investors who were and weren’t advised. Those with advisors had the vast majority match or beat the ETF basket's returns. Those who invested in ETFs on their own, averaged a 3.5% return. As I have stated many times, emotions in investing is just gambling. Emotions obviously took over on this group in the study. That is triple the return on average.

  4. Another ETF firm has put in writing that a good mutual fund manager will always beat ETFs and their relative index over time. They understand that there are short periods of time that the manager is usually controlling risk during these lagging times. They have either repositioned a portfolio for the future to continue their good long term returns and/or lessening the downside for investors during corrections. There is a lot of work put in to getting the right fund, controlling risk and competently matching this to right investor.

A Real Life Comparison

I just did a search on Google and picked the first Canadian Equity Mutual Fund on the search page that was covered by Globe Investor and found the following:

Globe Investor correctly compared this fund to the TSX Total Return Composite (which includes the dividends paid)

An investor who invested $10,000 in Dec 2004 would have $29,642 on March 31, 2015 - Mutual Fund

An investor who invested $10,000 in Dec 2004 would have $20,938 on March 31, 2015 - TSX Total Return

The return to the investor is just over a double in the TSX Total Return Composite and a hair under a triple in this Mutual Fund. I don’t know anyone who would prefer to make a double as opposed to a triple and have a portfolio manager controlling the risk. By the time you add the management cost for the corresponding ETF, it is even a wider spread.

I have been in the industry since 1986 and am able to do the proper analysis to find these managers. I tend to never use Bank Owned Mutual Funds as I find that these funds usually make up the 75% of the funds that underperform. They are so large and unwieldy that it is almost impossible for their managers to outperform. Most of the investors in these funds have done a computer driven questionnaire and then invested in the funds of the bank they were in at the time. Clearly not a good independent decision. No one institution can have the best of every fund. This selling style guarantees underperformance in the long run. Yes, they can have good times, but the whole portfolio will vastly underperform well-constructed portfolios over time.

When these news readers and writers state things as if they are an expert, they don’t know the damage they are doing. They are not there to pick up the pieces after the destruction is done.

If you want to see what a truly independent investment/insurance advisor can do for you, call me at 905-846-9060, ext.3838, email me at Terry.McIntyre@manulifesecurities.ca or visit my website at www.terrymcintyre.ca