Street Smarts

By Warren Mackenzie on November 28, 2013

There is one investment strategy that is so simple, it could be the recommended strategy for a book called The Idiot’s Rules for Investing. Many readers will be wishing their advisors had delivered results that were this good.

In a nutshell, the strategy is simply this:
put all your capital into the balanced mutual fund recommended by your bank teller. This strategy is so simple that on their first day on the job, a bank
teller could fill your order. Then, you’re done. Absolutely no skill is required 
to buy a balanced mutual fund. So you have to ask yourself, “Why am I paying high fees if I’m not doing as well as a balanced mutual fund?”

The investment statements you receive from your bank are unlikely to show the actual rate of return you’ve earned. So there is one easy step you have to take to verify whether or not you’re doing
as well as the ‘No Skill Required’ portfolio. Go to www.showmethereturn.ca and
 calculate your return to see how it stacks up with the returns shown below.

Please note, we are not suggesting that a bank-owned balanced mutual fund is the best solution for
most investors. But this is such a simple solution and since no investor should ever do worse, you
 can use the performance of the large, balanced mutual fund as the lowest acceptable performance benchmark.

Morningstar, an investment research firm, reports the following annualized returns (after fees) for the period ended December 31, 2012, from three of Canada’s largest global balanced mutual funds:

Fund Name

1 Year

3 Years

5 years

RBC Monthly Income

6.4%

5.5%

7.7%

Fidelity Canadian Balanced

10.0%

6.2%

9.3%

BMO Monthly Income

7.1%

4.9%

7.2%

Average

7.8%

5.5%

8.1%

Note:  All returns are annualized for periods ending October 31, 2013 and were retrieved from www.morningstar.ca

If we take the average performance of these three large balanced funds, it shows that over the past three years, investors who followed this ‘no-brainer’ strategy are up by about 17% (5.5% per year compounded for three years). 
Balanced mutual funds, however, have high MERs (management expense ratios) and
 educated investors can exceed these returns simply by using lower-cost investment vehicles.

When you are reviewing your rate of return, keep the following points in mind:

  1. Short-term returns (less than three years) can be very misleading. You should be looking at three- or five-year rates of return.
  2. In a well-diversified portfolio, some investments will be doing well and some will be doing poorly. However, you need to look at the performance of the total portfolio, not the individual parts.
  3. The long-term cost of underperformance is staggering. If you’re 50 years old and have an investment portfolio worth $200,000, and you consistently underperform by 2% per annum, you will have
$500,000 less to spend in your retirement.
  4. In these highly volatile times, it makes sense to be well-diversified, to keep things simple and to expect value for the fees you pay.

Unless you are willing to accept a much lower standard of living in retirement, you need to take action now if you are under-performing compared to the very low balanced mutual fund benchmark.

Warren Mackenzie

Warren MacKenzie, Principal at HighView, has been in the investment industry since 1987. Following his passion for educating investors, he has contributed frequently to various print and broadcast media outlets. Warren has written two books about investment strategy and retirement planning.
wmackenzie@highviewfin.com'

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