Mutual Funds are a waste of money! There, I’ve said it out loud. Coming from a background in the financial services industry this is pretty much heresay. I’ve heard it said that 75-80% of all mutual funds do not do as well as the market, despite the fact that all mutual funds state that their goal is to do just that.
This failing of course can be explained many ways, but chief among them is the service fees that the mutual funds charge eat into their performance. These service fees can be as high as 4% and if in a typical year the market returns 8% then you can see that a mutual fund would have to do 50% better than the market just to match the markets performance.
Now ETF (Exchange Traded Funds) on the other hand seem to have a place. With their expense ratios in the neighbourhood of 0.5% and even less sometimes they allow an investor to put money into specific market segments such as metals, financials, emerging markets, commodities and hundreds of others. Thereby allowing the investor to bet on a market sector rather than a specific company. This gives one the feeling of security that diversification brings.
There are lots of great ETFs out there and while you will never hit the mythical “ten-bagger” with an ETF you can invest very successfully by understanding overall market trends. For example if you believe that the US dollar is bound to fall due to massive governmental debt loads, then you would want to look at an HDD.TO. This is a Canadian dollar denominated, US dollar bear plus (or ultra short) which uses leverage to achieve a result that rises twice the percentage that the US dollar falls.
You may also want to consider HBU.TO which is a Canadian dollar denominated, gold bear plus (or ultra long) which uses leverage to achieve a result that rises twice the percentage that gold rises. To be specific it aims to double the performance of the current months gold futures contract. Unlike GLD (or IAU) which is US dollar denominated and is based upon the value of gold bullion.
Do some research however as these bear and bull plus funds that use leverage aim to double the result of the underlying index on a daily basis. Over time these funds stray from their stated goals and combined with expenses do not match 200% of the performance of the index they follow.
What is your opionion? Are financial advisors worth their expense. I would hazard that while some are no doubt brilliant (and hopefully worth it) most people who claim to be “advisors” are in fact nothing other than salesmen (or saleswomen).
The vast majority are, in my opinion, pushing the latest products from their head offices and are really just watching their own bottom line. In otherwords they are recommending the product that gives them the most commission. To be fair the salesman will usually try to find the best catagory of products for their clients, but will typically end up recommending the highest commission product within that catagory.
Most of these salesmen are not bad people (Bernie Madoff and Earl Jones are the obvious exceptions) it is just that they are set up from the get go to promote popular and expensive products from their head offices. Keep in mind they get paid based on commission – not fee for service. For an ‘advisor’ to survive the first few years of business they must maximize their commissions until eventually their renewal commission will allow enough of a buffer that they may actually recommend a product that is not the highest possible commission.
In the land down under (Oz) they are moving to a fee for service pay structure and getting away from commissions paid by the companies that provide the financial products. With commission based pay there is a real conflict of interest no matter what the salesman says. Canada needs to move in this direction as well.
Hello to all. Well if there is one thing you must do in 2010 is open up a TFSA before the federal government changes its mind and closes this great opportunity for Canadians to save money. For those who don’t know a TFSA is Tax Free Savings Account, but it is not just a savings account. In fact you can consider it to be an umbrella that can hold any account that you could put in your RRSP (Registered Retirement Savings Plan). Here is a link showing what is allowed. http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/nvstmnts-eng.html
Currently you are allowed to deposit $5000 per year into a TFSA, but don’t worry if you forgot to do it last year, you are allowed to carry over the amount you didn’t contribute. Even if you didn’t open an account last year (the first year you were able to do so) you could deposit $10,000 this year to make up the difference.
Within the TFSA all income earned is TAX FREE. So interest income or capital gains income or even dividend income is all yours. The implications are awesome. While you don’t get a tax deduction for contributions like you do with an RRSP, tax free is better than tax deferred. Of course you should consult with a tax professional to determine which account is better for you to max out first.
For more information see the gov’t website on TFSA http://www.tfsa.gc.ca/index.html