Archive | January, 2010

Couch Potato Basics, Part 1: Low Costs

This post is the first in a five-part series outlining the primary benefits of the Couch Potato strategy.

Mutual funds are a great investment tool—in theory. They allow small investors to pool their money and buy stocks and bonds that would be far too expensive to purchase individually. They’re managed by professionals who—presumably—use strategies that are more sophisticated than those the average investor could employ. No wonder so many Canadians own them.

Unfortunately, mutual funds have a fatal flaw: they’re too expensive. Especially in Canada.

Equity mutual funds offered by the big banks typically charge 2% to 2.5% in management fees, often considerably more. Fund companies that sell their products directly to investors—such as Phillips Hager & North, Beutel Goodman and Mawer—charge lower fees, but 1.2% to 1.5% is still typical.

Canadians, in fact, pay the highest fund fees in the world: a recent report by Morningstar graded fund expenses in 16 countries and gave Canada the only F. “Canadian investors are comfortable with the fees,” the report says, “because they don’t know how low these fees should actually be.” Now doesn’t that make you feel like a chump?

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Welcome to Canadian Couch Potato

Welcome to Canadian Couch Potato, a brand new blog intended to help investors looking for a low-cost, proven strategy that anyone can implement.

The Couch Potato strategy (also called index investing, or passive investing) involves buying and holding low-cost index funds designed to deliver the same returns as the overall stock and bond markets. After all, no one needs to beat the market to be a successful investor. From 1980 through 2009, Canadian stocks and bonds both averaged 10% annually, including dividends and interest. A 40-year-old investor who started saving $250 a month 25 years ago would be ready to retire with a $300,000 nest egg today if she had simply earned what the market offered.

Unfortunately, most investors earn nowhere near market returns. They chase hot funds, or make bets on individual stocks or sectors of the economy. Or they invest in high-cost mutual funds that pay 1.5% to the fund company and another 1% to the advisor before handing over what’s left.  And how do these investors fare? According to research from Dalbar, during the 20 years ending in 2008, the average mutual fund investor in the US earned well under 2% annually! There are no comparable data for Canada,

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