The Downside of Mutual Funds
Posted by Gail | Filed under Insurance
Big News At The End Of This Blog!
One of the biggest arguments against buying mutual funds is just how expensive they can be. A fund’s MER or management expense ratio refers to the management fees, administration charges, taxes, and trailer fees paid to the guy who sold you the fund. The MER is reported as a percentage of assets under management for the previous financial year and can vary from one year to the next.
The returns you see advertised already account for the MER but you should still pay attention to how much you are paying since higher fees do not always translate into better returns. In fact, some studies have shown that the lower a fund’s fee, the more likely it is to post better-than-average future returns. So at least with mutual funds it’s not a case of “you get what you pay for.”
Another downside to MFs is that they must distribute their capital gains at the end of each year even if a fund has declined in value. If you’re holding the fund outside of a tax-deferred plan you’ll have to pay tax on any capital gains distributions made. This lack of control makes some investors wary.
And mutual funds have the option to merge. When Mutual Fund Company A buys Mutual Fund Company B, and then proceeds to amalgamate, integrate, consolidate the funds, investors who bought one fund can end up holding quite a different fund. Two mid-sized funds that become a large fund can force the investment manager to stick with large cap funds, changing the very nature of the fund. With wheelbarrowfuls of money to invest, buying what amounts to itty-bitty pieces of teeny-weeny companies is too much work. A mega-fund can’t really afford to divert efforts to a lot of small companies since they’ll have little impact on the portfolio. Changes in management style may not be immediately apparent. But watch your fund move from having a wonderful performance because it is nimble, to the just-average performance of a well-managed monolith and you’ll become painfully aware that bigger is not always better.
And heaven forbid that a fund fall from consumers’ graces. When a fund fails to meet investor expectations, investors who were attracted by those flashy ads are apt to cash out. Now the manager is forced to commit a larger portion of investment dollars to cash as a cushion against redemptions. Or, worse, they must sell securities to meet redemptions at exactly the wrong time in a market cycle, selling high when they should be buying low. Transaction costs go up and remaining mutual fund holders have to eat the costs.
Of no small concern to some investors is the movement of managers in the industry. While a change in managers does not signal the demise of a fund, it can be pretty frustrating to buy into a fund manager’s philosophy, plunk down your money, and then have the manager leave with nary a good luck sucker! It feels like bait and switch. Having analyzed the fund manager’s track record, a management change means you’ll now need look at the performance history of the guys who are taking over in deciding if this fund should remain in your portfolio.
Regardless of the distractions and the detractors, mutual funds have allowed investors the opportunity to enter the investment marketplace in order to earn potentially higher returns than those available on traditional investments such as GICs. This is particularly true during periods of declining interest rates when consumers become less and less interested in the secure investments they’d held in the past because they just didn’t pay. But knowing the downsides is part of understanding what you’re buying. Do your homework, get smart about investing, and then you can buy whatever you choose with confidence.
Next week: The Many Styles of Mutual Funds
Last week: All About Mutual Funds
So, do you want to know what The Big News is? It seems that all you people who wrote to Slice to say you desperately wanted more episodes of Til Debt Do Us Part will have your way! Congrats of making the world turn in your direction. Yes, this summer, I’ll start shooting 15 new episodes of TDDUP. They likely won’t air until 2011, but they’re on their way. Stay tuned and I’ll let you know what Slice and Frantic are looking for when it comes to the families we choose, and how you can apply.
May 4, 2010 at 7:22 am
Yea!!!! Although I am looking forward to the princesses too!
May 4, 2010 at 7:25 am
Congratulations on another 15 episodes of TDDUP! I am so excited Gail! I even watch reruns in hopes I pick up an extra tidbit of advice, or to just pick up your awesome people management skills!
That’s great, great news!!
May 4, 2010 at 7:32 am
Congrats on the 15 more episodes of TDDUP. Looking forward to them, and Princess.
May 4, 2010 at 7:56 am
can’t wait for the new episodes!
May 4, 2010 at 7:58 am
I’m so happy, although, unless I’ve seen it several times I’m always up for watching a repeat when I’ve been feeling less that stuck to my budget!
May 4, 2010 at 8:00 am
With all those down sides I don’t know what to do with my money for investing.
Congrats on the new shows. too bad we are out of debt or we’d apply.
regards,
Jason
May 4, 2010 at 8:30 am
YAY we get to see more Gail!! And yes, I am almost scared of mutual funds precisely because of the MERs and all the behind-the-scenes management. I’m enough of a control freak to want to do it myself, but I don’t have enough time to do a good job. I feel stuck!!
Can anybody give me a list of sources for segregated funds?
May 4, 2010 at 8:51 am
Thanks for your article on “variable earning” yesterday. As a veteran independent contractor (24 years) it can be challenging to set up a spending plan. It does take both discipline and flexibility.
Yay, more TDDUP! We just discovered it over the holidays but I really wish we in the US could view the “How Are They Doing” segments. Soemtimes I’m tempted to drive up to Ontario just to rent a hotel room and watch ‘em!
May 4, 2010 at 8:58 am
yohooo!!! congratulations for the new TDDUP episodes! i can’t wait to see them!
May 4, 2010 at 9:18 am
@ Jason and Sandy… I finally heard what Geoff has been saying for ages and am in the process of killing my MFs and moving them into ETFs – I’m still trying to wrap my head around how to move them ‘in kind’ so it doesn’t affect the bottom line of my RRSPs…
There is a whole bunch of info available on the web, just do a google search! Or some of the canadian financial blogs out there. Check out this link to see a graphical picture of what MERs do to a funds return! http://michaeljamesmoney.blogspot.com/2009/12/mer-drag-on-returns-in-pictures.html
You will probably take a hit for moving the money because of back-end fees, but IMHO, in the long run you will win out! Those darned fees!
It doesn’t take a lot of effort to set them up, just a little bit of research. I’m going to use TD e-series funds and once it’s set up it’s no different from handing your money over to your MF salesperson… uhhh, advisor…
All the best!
May 4, 2010 at 9:20 am
@ Jason and Sandy – consider Index fund investing through TD efunds. Very Low MERs, no manager, no fees to buy or sell. (unless you sell within 90 days of buying). bing td efunds at canadiancapitalist for a walkthrough. AKA couch potato investing. For those with more bucks to invest (ie $5000 at a shot) consider Index fund ETFs.
May 4, 2010 at 9:26 am
Wow the power of viewer voices
Very excited about the new shows. Now if only our voices will grant us a few more ‘where are they now’ segments.
May 4, 2010 at 9:26 am
Thanks for the MF primer Gail! The MERs are also the main reason I’ve avoided MFs and invested in ETFs.
Congrats on the 15 episodes! Looking forward to it – I’ve been watching the ones from the very first season to tide me over for your new show Princesses even though I’ve seen them many times before
May 4, 2010 at 9:31 am
Thanks for this valuable info. I feel like my poor head is swimming, trying to figure out if we’re in the right funds or not. More research will be needed…I feel good that at least we’re saving a good chunk monthly. For a while I was so wrapped up in what to invest in, we weren’t investing in anything.
I’m so pumped about the new episodes! That is so cool! I hope they let you do more “where are they now” pieces too. Those are so fascinating to me.
May 4, 2010 at 9:47 am
For all of you out there knocking MF please read this article… It’s so easy and fashionable to put down MF
https://secure.globeadvisor.com/servlet/ArticleNews/story/gam/20100428/HALLETTATL
May 4, 2010 at 9:48 am
Oh, I also wanted to comment on the title Financial Advisor. I have to say I completely disagree with a mutual fund salesperson being called an advisor. Yes, I’m sure there are some very knowledgeable and qualified persons selling mutual funds, but to call them advisors is quite a streatch!
There is a huge conflict of interest involved when the person ‘advising’ you on which funds to buy, can be influenced by the mutual fund company they work for to sell you higher fee funds, so that he can make more of a profit…
In my opinion, they are salesmen/women who give some investment advice, not advisors who sell products!
May 4, 2010 at 10:51 am
Wow! I’m so excited about the new episodes! That must have been a big decision for you, Gail. I hope you enjoy filming them.
May 4, 2010 at 11:19 am
Wow this article was totally worth the wait!!! Thank you Gail!! Also I’m glad to hear about TTDUP, it’s a great show!
@Cab – what a bunch of half-baked mambo jumbo!!
May 4, 2010 at 11:33 am
Yea! Yipee! Hurrah!
May 4, 2010 at 11:34 am
Congrats on getting another season! Good to know that someone actually listens to what the people want!
May 4, 2010 at 11:40 am
@ Jason – Unfortunately there is an upside and downside to every type of investment out there, the key is for you to gauge your risk tolerance, time horizon and goals and invest in the tool will get the job done.
If the perfect investment was out there, I don’t think we would be having a conversation talking about mutual funds, stocks, etf’s, etc.
Congrats Gail on new episodes, more importantly on being able to change the lives of 15 more couples.
May 4, 2010 at 12:00 pm
seriously, I dont understand all the negativity about MERs. You are paying professional managers to make investment decisions based on your risk level. Are you willing to take the time to do all the research yourself? and then, what would you pay yourself?
When I get my haircut, I pay a price. Incorporated in that price, is a cost for product, the chair (my hairdresser does not own the salon where I go). Incorporated in the $35 haircut, is her MER….her expertise to cut my hair ’cause I just dont want it to do it myself, nor do i want to learn how to.
Almost every service has an MER…….
May 4, 2010 at 12:06 pm
Timing is uncanny. I just got a letter in the mail today telling me my mutual funds have been bought out by another company as of the beginning of June!
I’m so excited about the 15 new shows. Thanks for agreeing to do them Gail. We love you and your sound advice, and I look forward to seeing these new episodes. Thanks for sharing the news!!!
May 4, 2010 at 12:10 pm
Yay more shows!
May 4, 2010 at 12:28 pm
@ Sandy = Can anybody give me a list of sources for segregated funds?
Seg funds are mutual funds purchased by Insurance companies and the MER are higher than the original fund. This is to fund the maturity & death benefits. Term insurance is cheaper!!
May 4, 2010 at 12:35 pm
@Mel – in the words of Canadian Capitalist,
Sure I pay my hair dresser to cut my hair. But if my hair dresser made a big bald spot on the side of my head, pricked my ear, stepped on my shoes and charged me for the priviledge, then for sure I will be cutting my own hair.
May 4, 2010 at 1:44 pm
YEAH! I’m so glad TDDUP is going to continue! I love your show and I wish that someone in the US would do a similar show… I know SO many people who could use your special brand of help (although, I doubt the hugs would be as good!)
May 4, 2010 at 2:06 pm
Lisa, there was a guy in the US who had a show similar to Gail’s , I think it was called Big Spender. It was canceled. It was good too, but not as good as Til Debt!
May 4, 2010 at 2:19 pm
Yay, more TDDUP!!!! I am still waiting for Princesses to premiere…can’t wait to see what you say to them about their debt! Should be good, lol!!
May 4, 2010 at 2:58 pm
@ Mel – Nothing wrong with paying MER’s, but do you realize that Canada has the if not the highest very close to the highest MER fees in the world? In 2006 or 2007 I believe out of 18 countries Canada was ranked #1 for having the highest mutual fund fees.
There are only so many dividend paying companies in Canada with a solid performance record, solid management, solid fundamentals, etc., so why do the fees vary so much between institutions? We do pay too much.
May 4, 2010 at 3:04 pm
Congrats on the new TDDUP episodes. Always good to see good people getting good work!
May 4, 2010 at 3:33 pm
@ Mel – nobody here I think has anything against paying MERs if the managers are doing a good job. The problem is that since 4/5 Mutual funds fail to beat the index consistently, for the majority of people out there they’d do better with an index fund that just aims to match the index, less a small MER. THe other big problem I have with MERs is the lack of transparency. Rather than saying the return was 5% – 2% MEr = 3%, they just say return was 3%. Disingenious at best.
Your analogy is flawed. It’s more akin to saying something like the following riddle. Say I pay my barber $35 for a haircut that I don’t like 80% of the time but LOVE 20% of the time. But my wife is willing to cut my hair for free that I like but don’t love 80% of the time (and am mildly disappointed 20% of the time). Which is better?
May 4, 2010 at 4:41 pm
@Geoff – Being given a bald spot and having my ear nicked is a better metaphor because that’s that I imagine living off tuna cans in my retirement would feel like.
May 4, 2010 at 4:43 pm
@ Ionan – there have been times when the fund managers have clobbered the market returns (ie warren buffet, all time superstar). So it’s not fair to say that all mutual funds all fail…… just most probably will.
May 4, 2010 at 4:52 pm
Very cool, congrats, Gail, looking forward to watching you in action again!
May 4, 2010 at 5:02 pm
sooooooooooo excited about new episodes to come, i’m in withdrawl, lol!!! that’s great Gail!!!
May 4, 2010 at 6:11 pm
Congradulations on a new season of your show. I love your style of advice giving! I’ll be watching for them in 2011.
May 4, 2010 at 6:28 pm
OMG I am thrilled for you Gail and for the rest of us whom LOVE TDDUP!!!!!!!!!!!!!!
Congrats!!!!!!!!
May 4, 2010 at 8:15 pm
Financial Advisor does not = salesperson…it’s about the ADVICE…and how it can add the most value to the client…it may or may not include a “sale”..
As for Mel’s analogy, I agree, almost every service has a MER in one way or another…some things are worth paying more for, some things are not, the choice is ours and I like having that choice…I trust my advisor, I listen to the advice, I do some research on my own and then I make an informed decision…there are ALOT of good advisor’s out there…and if you don’t believe that then maybe, you just haven’t found the right one:)
May 4, 2010 at 8:23 pm
Am gobsmacked here! Wonderful news! More Gail TV! Slice execs. are not dumb. They know a good show when they see it! Can’t wait! Congratulations Gail!
May 4, 2010 at 11:45 pm
YES !!!!! You just made my day (or should I say night ) ? That is truly amazing – things like that don’t generally happen. Thanks so much. I can’t wait to 2011.
May 5, 2010 at 9:17 am
@ Sparky – I agree. There are good and bad advisors out there, some are more like salespersons and some are truly good advisors. Just like we’ve all had TEACHERS, and we’ve all had…. teachers.
May 5, 2010 at 12:04 pm
Yay for new episodes!
May 5, 2010 at 2:03 pm
@Sparky – how do you pay your advisor? Does he/she get the same commission no matter what he/she advises?
May 5, 2010 at 4:33 pm
My advisor works for a bank…same as I do…and I also sell Mutual Funds in my role…we are paid a flat salary no matter what we do in the day…lending, investing or strictly advice…the pay is the same…..deal with a reputable bank and you won’t have to worry…we aren’t going to sell you anything that is not suitable, first and foremost because we are ethical but also because at the end of the day my salary is the same whether you buy mutual funds, a gic, or simply put it in an old fashioned savings account…I like to have a detailed conversation with my client to find out what’s important to them and then make a recommendation that is best for them and only them…once they have all the information then they can make an informed decision…
May 5, 2010 at 11:22 pm
If all your advisor does is sell you mutual funds then you are not getting your monies worth from the MERs. I am a Financial Planner (CFP) that provides advice to my clients regarding investments, risk management (life and health insurance), estate planning, mortgages, tax planning and preparation, debt management and budgeting etc. If you can find the time to learn all about every aspect of your finances and do it all yourself, go for it. My clients however appreciate my knowledge base and advice and understand exactly how I get paid. They realize that I need to be paid for what I do just like everyone else, the difference is whether or not you are getting what you pay for. BTW, I now offer portfolios that use indexing and ETFs as integral components that have lower MERs than traditional MFs.
May 6, 2010 at 9:05 am
http://www.advisor.ca/advisors/news/industrynews/article.jsp?content=20100505_115324_4812
Please read, your ETF does not differ between companies, does not decide if it’s beteer to be in financials or energy, does not care about mangement or other issues, it packs companies and away we go!!!
May 6, 2010 at 10:52 am
@Sparky:
You get a salary true, but my understanding of the banks selling mutual funds is that there are sales quotas. I assume if you consistently underperform against your quotas, you risk job termination. Seems like there is an incentive to “advise” your clients in a particular direction.
@CAB:
You clearly have a reason why you’re pushing actively managed mutual funds – my guess is you sell or earn your salary from it in some way. At the end of the day, empirical evidence shows that over the long term, only 20% of actively managed funds can outperform the benchmark (i.e. index of a market), especially factoring in MER fees. The first three months of 2010 – as the article to your link looks at – is hardly indicative that actively managed funds are a better choice over the long run.
So if I have a choice of earning average returns by following an index, or go with an actively managed fund where only 20% of the time those funds can beat the index (and 80% I’ll earn less than the average), probability states that I should go with something average, especially when you factor in that past success does not correlate into future success. That’s like picking Warren Buffett before he became known as the Guru of Omaha. If everyone knew at the time, everyone would be loading up on him.
May 6, 2010 at 2:28 pm
the sales quota includes all products we provide…not just mutual funds…i could not sell a single mutual fund all year and still make my quota, so no that is not an incentive to promote something that was not suitable for the client….i will repeat : we are an ETHICAL institution…and a salary based organization…no commission…
May 6, 2010 at 6:52 pm
[...] This post was mentioned on Twitter by Jayn Steele. Jayn Steele said: The downside of Mutual Funds – what every investor should know before purchasing. http://bit.ly/akMTM3 [...]
May 6, 2010 at 10:18 pm
[...] is a lot to be said for mutual funds but investors should also be aware of the downsides, says Gail [...]
May 7, 2010 at 7:51 am
[...] is a lot to be said for mutual funds but investors should also be aware of the downsides, says Gail [...]
May 7, 2010 at 1:46 pm
Cundill Value, which is a international fund lost 2% yesterday, I shares MSCI Index 3% hold your ETF it’s a safe bet…
May 7, 2010 at 6:00 pm
I may be shot for saying this, but what has the 10 year return for the TSX composite index (no fees charged)? For the last 10 years ( March 31, 2000 to March 31st 2010) been?
a) 3.79%
b) 7.65%
c) 5.25%
d) 2.43%
e) -2.2%
The correct answer is d) 2.43% (with no fees charged!)
How about this… DOW JONES Industrial average (no fees charged) 10 year return…Mach 31/2000 to March 31/2010 in US dollars?
a) 4.25%
b) 6.19%
c) -.06%
d) -2%
e) 7.39%
The correct answer is c)-.06% (in US dollars!), in Canadian dollars it is -3.58%!
Source Globe HySales.
After today’s numbers (May 7th) the numbers are worse!
May 8, 2010 at 2:59 am
Hi Gail,
Congratulations on another Season! I hope they backed up the money truck to your house to film more shows.
May 8, 2010 at 6:49 pm
Gail: I am delighted you are taping 15 more shows. I don’t think it’s enough: You should be on daily. Your show is SOOOO needed. I have learned a great deal about budgeting, for which I am very grateful.
May 9, 2010 at 12:18 pm
@brian – that just means that half of mutual funds / stocks had worse returns than that.
Silly.
May 10, 2010 at 10:47 am
@ Brian – I think it’s a little odd that you focused only on 10 years. Expanding on that shows more positive data.
* The yearly return from 1900 (end-of-year 1899) through 2009 was approximately 9.4% (4.7% price appreciation, plus approx 4.7% in dividends)
* The return from 1929 (End-of-year 1928 — i.e., before the crash) thru 2009 was 8.8% (4.5%, plus 4.3%)
* From end-of-year 1932 (i.e., after the crash) – 2009: 11.1% (6.9%, plus 4.2%)
* For the last twenty-five years, the annual return was 11.9% (9.0%, plus 2.9%)
* For the last 20 years, 9.4% (6.9%, plus 2.5%)
* For the last 10 years, 1.3% (-1.0%, plus 2.3%)
* For the last 5 years, 1.9% (-0.7%, plus 2.6%)
* For up to March 2009 the stock market (Dow/DJIA) return was 22.0% (18.8% plus 3.2%)
This is only up to 2009, I couldn’t find 2010 quickly but I think the return is very good from 2009 – 2010.
Not sure if your numbers include the dividends but they really should.
http://observationsandnotes.blogspot.com/2009/03/average-annual-stock-market-return.html
May 10, 2010 at 10:36 pm
Geoff,
I don’t know if you are looking at TSX composite or something else. The numbers is what the index did over 10 years (march 31). This is with no fees.
The point I was making is ten years is a long time. Most people don’t have the patience. The returns for 2009 was the best in 26 years at about 30%. If I look at the market low which was March 2009 to December 31 2009 the return was over 57%. Source CBC
http://www.cbc.ca/money/story/2009/12/31/tsx-2009.html
It is not unusual to have long periods of poor returns (ten plus years)
One example is from 1929 to 1949… bonds out performed stocks (US) twenty years.
What is talked about is the rates of return which can/does change rapidly. A index or mutual fund or stock which did say 7% as an average return in the past 20 years is different when someone says the same fund/index holder only averaged 2% in the last ten years.
What is different today I believe, is the amount of debt/lack of retirement (money) people have today vs. 20 years ago. Government debt (Greece and others like the US) is at an all time high, so assuming returns will be the same as they were in the past maybe asking for too much.
A great story to read is from Al Rosen (a forensic accountant) who wrote for Canadian Business ” the lost decade that was too good to be true”
May 11, 2010 at 9:06 am
@ Brian – the figures are from the Dow Jones Industrial Average. My point was simply that 10 years is NOT a long time if you’re investing for the long run. My 2 year year old will, in 10 years… only be in grade 7 in ten years. That doesn’t seem that old to me
I can’t predict the future, but I can take a look at the past and have a few issues with your assessment of the market crash. From the NY times “Historical charts seem to show that it took the 20 years plus to recover from the market crash. But In fact an investor who invested a lump sum in the average stock at the market’s 1929 high would be back to break-even by 1936 less than 4.5 years later after the 1932 low. How?”
The answer is deflation – less money went further in 1936 than more money did in 1929, so stating market returns without accounting for deflation exaggerates the decline. Dividends – in the market low of 1932, the dividend yield of the overall stock market was close to 14% – that’s whopping.
Dow Vs The Market – this is a bit more complicated but basically IBM was not included in the DOW, even though it was a great performer in the 1940s, which helps understate the DOW’s return.
My point is simply that the stock market is not a bad place to be if (a) you watch your fees (b) you really know your time horizon (c) you know what you’re buying, ie the index is a pretty safe bet. The last place I would be, as a relatively young man at 34, is in the bond market. But ultimately everyone has to choose their comfort level. I didn’t really mind anything you’ve written, but wanted to show the otherside of the coin too, that over a longer period the stock market has historically done investors very, very well.
For the full article:
http://www.nytimes.com/2009/04/26/your-money/stocks-and-bonds/26stra.html?_r=1&em=&adxnnl=1&adxnnlx=1240952325-kQBluoC9JuENpbMnfdagJA
May 11, 2010 at 9:33 am
Geoff,
You are right ten years is not a long time but for sub-par returns for many it is.
Ok, let talk about “But In fact an investor who invested a lump sum in the average stock at the market’s 1929 high would be back to break-even by 1936 less than 4.5 years later after the 1932 low. How?”
From its peak in 1929 until 1932, the Dow Jones Industrials crashed a cumulative 86%. But starting in 1933 the Dow raced ahead with a 66.7% gain. From 1933 until 1937, the Dow doubled in value. By 1937, the global economy began deteriorating once more combined with political turmoil in Europe. The Dow plunged 33% in 1937 and began a five-year bear market until 1942.
But if an investor bought stocks in late 1932, he still would have been sitting on a profit by the end of 1937 – despite the big drop that year. It’s a different story if an investor bought equities in 1929; where he would have waited 25 years to break-even…in 1954.
Let say in 1929 you gave me $100,000 …later at the bottom 1932 this would be worth $16,000 at 1936 it’s worth say $35,000 and I told you you broke even because everything costs less …how would you feel?
May 11, 2010 at 10:24 am
Brian, your returns clearly don’t include the dividends that are paid out during the timeframes. That’s a very unfair comparison, as dividends should be counted. That’s where that 25 years come from – by not including Dividends and just seeing where the stock prices return numerically to pre-crash numbers. But that’s like showing the rate of return on a savings account, and not including interest (0%).
There’s a neat calculator at the site below that shows you what your money would amount to by investing it, and when using actual data. In Jan ‘29 I invested $100,000. In Dec ‘32 it’s worth roughly $37000. BY Dec 1936 it’s back up over $100,000. Not too bad, given the nightmare. By 1954, it’s worth $645,000. In 1969, (40 years) it’s worth $2,700,000. All figures do not factor in inflation, which I’ll address now.
Your second question – how would I feel since deflation is helping me buy more. Would I be happy? No. Would it help? Yes. Would I have the confidence to keep my money versus panically selling like many did last week? I hope so. But conversely, ask me how happy I’d be if the bond market returned me a consistent postive average of 3% a year…. but inflation was running at 2% a year. In actual terms, that’s a 1% return. Inflation and deflation do really matter.
http://www.moneychimp.com/features/market_cagr.htm
(It’s S&P 500 but close enough)
May 11, 2010 at 4:48 pm
Geoff,
You forgot after 1936 in 1937 the market was down over 32%. So the $100,000 was down to about $73,000.
Also the you would be paying taxes on the dividends. Were would this money come from the funds or would you reduce your lifestyle? Then there is the opportunity cost on the taxes you paid which continues until the day you died. So when some does poorly and pays taxes even when they lose (even on paper) after 10 plus years how would they feel?
May 12, 2010 at 8:38 am
Please read, ETF can be scary at times and I doubt the people who buy them really take their rime to investigate the underlying companies. They follow the crowd and the media, it’s cheap then it’s good…
http://www.theglobeandmail.com/globe-investor/investment-ideas/features/investor-clinic/how-to-protect-yourself-from-etf-pain/article1565500/
May 12, 2010 at 9:59 am
@ Brian – Dividend taxes are much lower than income taxes (for cdn companies) and besides they might just be inside the rrsp anyway so there’s no payment out.
You keep asking me about ‘feelings’. Quite frankly I invest without emotions; I realize that in a 10 year span historically speaking my returns might be low or negative; but in a 20 year span historically returns have done well. Feelings have nothing to do with it.
Finances shouldn’t get emotional. It’s not personal, it’s just business. For instance, I know people who ‘feel’ they need life insurance for their children, which I think is a useless waste of money (because the loss of my son would, financially, be a good thing, horrorific in all other regards). Maybe I’m a cold fish.
May 13, 2010 at 12:27 pm
Geoff,
You are mostly a better investor than the general public, but most invstors do poorly they sell low and buy high…see Nortel.
With the example of the DOW JONES or S&P (US) most of the returns are dividends.
Since we are talking the US, 401K plans (like RRSPs) were not around in the 1930′ 40’s etc. This means over time the tax bill every year would grow. One way or another you’d be in or go into an ever higher tax bracket. The taxes would come from your lifestyle or from the funds.
Top Tax brackets in the US (Wikipedia)
1930-1931 – 25% IRS
1932-1933 – 63% IRS
1934-1935 – 63% IRS
1936-1939 – 79% IRS
1940 – 81.1% IRS
1941 – 81% IRS
1942-1943 88% IRS
1944-1945 94% IRS
Even if the money was in a Tax plan like the RRSP about half the money (if it is a lot) goes to CRA. You also get the OAS clawed back plus the age amount which is well over $12,000 lost every year and growing. So even a 8% return, after taxes is really worth 4%, after inflation it is even less.
May 13, 2010 at 2:24 pm
@ Brian You’re kidding right? At least you didn’t ask Geoff how he “felt” about the tax rate in the 30’s and 40’s.
The 30’s and 40’s are referenced only for rate of return as applicable to what happens decade over decade.
We’re not living in the 30’s and 40’s — so your point about taxes sucking (and even then you use the TOP US tax brackets…. not a typical bracket for everyone) doesn’t translate to what the data was being used for.
Is there a reason why you can’t simply say, you may have a point Geoff? or perhaps, agree to disagree?
As an impartial referee, I declare Geoff’s numbers more accurate.
;-D
May 13, 2010 at 3:48 pm
@ Kat & Brian
to be fair, I enjoyed our comments back and forth and think we both did it with civility – not a common occurence on the internet. I’m glad that someone else is reading this comments though!
I get the point that Brian was making (sort of — I mean if they were invested in bonds or gics, wouldn’t they be taxed that same rate? The discussion here is on return rates) that taxes matter, because they do. Though looking at the top income bracket is a bit of a stretch isn’t it!
I’m not even sure we disagree — Brian says that the stock market can do poorly over 10 years. I never disagreed with that; I just wanted to show the upside that it can also deliver real solid returns too and to look at the most negative period is misleading. It also makes the assumption that the average investor does a lump sum investment at the top of the market, which isn’t always the case.
I do however categorically disagree with any stock market return assessment that strips out dividend payments or deflation/inflation, as I think that is ridiculous and not reflective of reality, especially since the longer the time period the more this magnifies the discrepancy.
Best,
Geoff
May 15, 2010 at 9:42 am
Geoff,
The basic idea of a rolling ten year returns being poor is agreed, but there is no
law saying we can not continue to have poor returns in the future. Which has happened in the past. The dividends you are factoring you still have not factored taxes… where does the money come from to pay for it…your lifestyle or the funds?
Since the returns are primarly dividends, this would become a bigger and bigger problem even when the stocks may be underwater, taxes must be paid. Taxes represent a much bigger problem than inflation/deflation. Since most Canadians work 6 months a year just to pay taxes.
Moving on…
Even in the dark days of the 1930’s personal debt and federal debt (factoring inflation) was much lower than is today.
Cheap money has fueled real estate to much higher levels than ever. (present day)
Lack of pensions/savings everywhere. (present day)
Low savings rate (present day) see
http://www.statcan.gc.ca/pub/75-001-x/commun/4096031-eng.htm
If you look at the Nikkei 225 which includes companies like Sony,Honda etc.
If one had $10,000 from July 31/1992 to March 31/2010 he/she would have $6,970
or an average loss over -2% each year! (no fees) Source Globe Hysales
What is different? They(Japan) had high real estate prices, higher interest rates, lots of government spending. Today they(Japan) have lower real estate prices, almost zero interest rates and lots of government spending, higher taxes.
At some point the the debts government/personal debts has to be paid, through hard work or defaults (or near defaults like Greece). Since these debts are at all time highs the outcome maybe tougher than in the past.
Taxes over time will go up and the governments in hard times will find more ways to get it. The HST is a good example. Toll roads and many others are good examples.
cheers,
Brian
May 16, 2010 at 8:40 am
Brian – I’m not quite sure what you’re saying, other than “the end is nigh.”
At some point, anyone who invests for the long-term is betting that the future will be better than the present and so I have to stand behind that.
And I agree — and gails’ show is evidence of this – that it’s our savings rates are low and taxes are a real problem. But at the same time, I didn’t become a father to see my son grow up in a mad-max style future and so far, where I live anyway, I see mom’s pushing strollers to starbucks, and not trying to raise chickens and hoard guns and ammo. So one lives in hope.
PS I do find it interesting that you say a 10 year return is categorically “bad” (not what I said, just that this 10 year period was poor that we’re talking about) but say “there is no law saying that cannot have poor returns in the future”. IS there a law saying we cannot have good returns in the future, too?
May 16, 2010 at 10:25 am
Brian, what do you mean by Canadians work 6 months to pay taxes? Are you referring to the taxes on pay cheques, or all taxes period?
My taxes (if I make the RRSP contribution that I’m capable of) are just under 8 weeks of work (so 2 months). If I don’t make any RRSP contributions, I’ll be working just under 11 weeks to cover my taxes.
In terms of regular purchases, well, most of my money goes to savings, groceries, rent, etc.
The taxes paid on consumer purchases amounts to less than 1/2 a week a month of work (so 6 weeks worth of work over the year) – that brings me to 14 or 17 weeks (3.5 months or 4.25 months).
Where does the 6 months of taxes come from? That assumes that we only get 1/2 of the money that we earn, but I can see on my expense sheet that I keep more than that.
Do you have any sources that I could read?
May 16, 2010 at 12:00 pm
Emma,
Great question! Here is your answer:
http://www.fraserinstitute.org/commerce.web/product_files/TaxFreedomDay2009.pdf
Another point on the Fraser Institute site:
… the total tax bill of the average Canadian family, found that taxes have increased by a whopping 1,624 per cent since 1961. In contrast, expenditures on housing increased by 1,198 per cent, food by 559 per cent, and clothing by 526 per cent from 1961 to 2009.
“Taxes have grown much more rapidly than any other single expenditure item for Canadian families to the point where taxes from all levels of government take a greater part of a family’s income than basic necessities such as food, clothing, and housing,” said Niels Veldhuis, the study’s co-author and the Institute’s senior economist.
http://www.fraserinstitute.org/newsandevents/news/7283.aspx
The number one problem many Canadians have, is all types of taxes HST, property tax, GST or PST. Income taxes, Capital gains, Diviends, probate fees, Taxes paid using a lawyer, an accountant, a financial advisor,etc. School taxes, you name it.
If you get T5s and T3s you are paying too much!
If you live in Ontario how about 407 toll road where you taxes on top of the toll!
The number one goal if you can (without risk) is to pay less taxes.
If you pay less taxes (or no taxes), generally you will make more money on any investment!
As far as RRSPs go,understand that CRA your partner. All you are doing is delaying the taxes. For many a better idea is to consider the TFSA or other things that allow you to get your money tax free.
If you have too much money in your RRSP or have a good pension (which is nice) this may mean claw backs (getting less money) on your OAS (old age security) which is at a Maximum Monthly Benefit of $516.96 (currently) which goes up over time.
see service Canada http://www.servicecanada.gc.ca/eng/isp/oas/oasrates.shtml#note
cheers,
Brian
May 16, 2010 at 5:06 pm
Emma:
Sometime in June (typically) someone releases the dates for each province when ‘people start working for themselves’. You can probably Google it. For most provinces, it is towards the end of June. I think it includes taxes on income (prov+Fed), sales tax + GST, municipal taxes… and maybe EI but not likely CPP (could be wrong on the last one). I don’t believe RSP is in there.
May 17, 2010 at 7:28 am
Emma, your question is a very valid one. The Fraser Institute is known as a very conservative, very right-wing organization. I take their data with amount of sceptisim. Another group reviewed the Institute’s data and found that ” The Brooks study claimed that the Institute’s methods of accounting excluded several important forms of income and inflated tax figures, moving the date nearly two months later in the year.” This might be more in line with what you thought. The larger point though that we pay a lot in taxes is true (but we do get a fair amount of services for it, ideally more but when I look at the US and its healthcare I shudder.
http://www.policyalternatives.ca/sites/default/files/uploads/publications/National_Office_Pubs/2005/tax_freedom_day.pdf
PS Brian I live in Ontario and have never ever taken the 407. Not even as a passenger.
May 17, 2010 at 9:13 am
Geoff,
Good point. Read Sheena Starky, Analysts, Library of Parliament.
http://www2.parl.gc.ca/content/lop/researchpublications/prb0632-e.htm#taxcanada
She makes end notes of the Brooks study. The point is your taxes are increasing every year, higher than inflation. Today, governments, are going further in debt to make up the short fall.
Do we get services for it (Taxes)? Maybe, but the fact that taxes are omitted from rates of return (see above) means what you get in your pocket and what is on paper may be two different things. Taxes, in many ways hurts more than inflation or deflation.
June 9, 2010 at 8:42 pm
Geoff,
Just a update for you, the Dow Jones is below 10,000 …you have to go back to 1999 (11 years ago) factor in inflation plus taxes you are talking 15 years. How is that for lousy returns (with no fees charged even).
In general many people want to believe the markets go up. But with high taxes, low wages more user fees (like HST) the highest debts for government (all levels) low or negative savings the market has to go down or go sideways for many more years… based on history until savings return to normal.
January 22, 2011 at 10:31 am
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