Review: Rob Carrick's Guide

Rob Carrick's GuideRob Carrick is one of a small number of journalists who stand up for individual investors in this country. If you’re not a regular reader of his columns in the Globe and  Mail, I encourage you to start. His latest book, Rob Carrick’s Guide to What’s Good, Bad and Downright Awful in Canadian Investments Today (Doubleday Canada), is classic Carrick: straightforward, easy to read advice that doesn’t kiss any asses in the financial industry.

The book is perfect for browsing, because it’s organized into lists such as “Seven dumb rookie mistakes investors make and how to avoid them,” and “Ten signs of a rotten adviser.” Here’s one of his assessments: “If an adviser isn’t an indexing adherent, then he or she should at least recognize the value of this investing approach. The test is whether an adviser trashes indexing, and many will. If this happens, then keep looking.”

Couch Potatoes will find lots of value here, including Carrick’s picks for “Five essential  exchange-traded funds”: iShares XIU (Canadian large-cap equities), XBB (Canadian bonds) and XIN (international equities), as well as Claymore’s short government bond fund (CLF) and Vanguard’s Total Stock Market (VTI). He also includes three sample portfolios using these ETFs, largely variations of the MoneySense Global Couch Potato. One quibble here: it’s not clear why he recommends Vanguard for US equities, but not for international equities: his choice, iShares XIN, charges three times more than Vanguard’s VEA, a steep price to pay for currency hedging.

Regular Globe readers will be familiar with Carrick’s excellent annual survey of Canadian discount brokers. One of the best chapters in the book is devoted to do-it-yourself investing, and Carrick has good advice on choosing a discount broker, and how to avoid some of the costly mistakes that beginners inevitably make when they start investing on their own. His message for small investors is reassuring: “You’re going to feel like a new and largely insignificant player in a universe of fast-moving money. Get over that feeling.”

Carrick has no time for financial industry nonsense, and he doesn’t pull punches: he names bank-sponsored index funds (except TD’s e-Series) among his “Five big, fat mutual fund industry rip-offs,” an assessment I agree with completely. He also takes fund managers to task for being sneaky about fees, and slams discount brokers for collecting trailer fees on mutual funds that were designed to go to advisers. (That’s right: if you buy an actively managed fund through an online broker, you’re paying for advice you don’t get.) He recommends Morningstar as a valuable resource but calls their star ratings “trivia for simpletons who think it’s possible to tell what a fund will do in the future by looking at a rating of its past performance.”

I was confused by Carrick’s claim, repeated several times in the book, that stocks have an expected return of 6% to 8%. Over the last 40 years, the total return on Canadian, US and international stocks is in the range of 11% to 13%. Carrick’s numbers either do not include dividends (an enormous oversight), or he is referring to real returns, adjusted for inflation. The latter method is perfectly reasonable, but should have been explained: after all, few people would invest in stocks if they could expect nominal returns of just 6% to 8%.

As this book demonstrates, most Canadian investment products and services fall into the “downright awful” category. We need more advocates like Carrick to point that out.

3 Responses to Review: Rob Carrick's Guide

  1. George January 30, 2010 at 11:27 pm #

    I’m curious about your concurrence with Carrick’s claim about bank-sponsored index funds being rip-offs. I’m a couch potato using RBCs funds, and I’m well aware that the MERs are higher than the TD funds. In real dollars, though, the differences aren’t that large.

    For example, the RBC Canadian index fund has a MER of 0.68 compared to the TD e-series fund’s 0.31. The difference of 0.37 works out to a fee difference of $37 per year per $10,000 invested.

    The spread on the Canadian bond index funds is even smaller (0.63 versus 0.48, a difference of 0.15, or $15 pear year per $10,000 invested).

    To me, those are very small differences, and well worth the convenience factor of having accounts consolidated with one institution. Sure, you could claim that the RBC fund charges “double” what the TD e-series fund charges, and you’d be right, but the actual dollar amounts aren’t that different unless you’ve got hundreds of thousands of dollars invested.

    I’m curious as to your thoughts.

  2. Pacific January 31, 2010 at 1:08 am #

    Great review of a great-sounding book.

  3. Canadian Couch Potato February 1, 2010 at 9:34 am #

    Thanks for the comment, George. After TD’s e-Series funds, RBC’s are the next cheapest option, and are a good choice for small accounts you contribute to regularly. (I use them myself for my RESPs.) However, virtually all index funds from CIBC, BMO, Scotia and even some of TD’s I-Series are way too expensive, often more than 1%. For an index fund, that’s absurd.

    The other point is that RBC index funds only look cheap compared to the trash offered by the other Canadian banks. American investors would be shocked to learn that we willingly pay even 0.68 for an index fund. Vanguard, Fidelity and Schwab all offer index funds for as little as 0.10, and you can easily build a complete portfolio for less than one-third the cost that we pay in Canada. With a few exceptions, ETFs are unnecessarily expensive in Canada as well, largely because many Canadians are apathetic when it comes to fees.

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