Archive | August, 2010

When Couch Potatoes Go Bad

Paul B. Farrell, a long-time columnist with MarketWatch, seems to have taken leave of his senses.

For years, Farrell has been a staunch defender of index investing, and he has tracked the performance of eight Lazy Portfolios of index funds and ETFs, each created by popular finance authors or prominent investment advisors. (All of them are designed for American investors, but Canadians can easily modify them.)

On July 13, Farrell wrote a column announcing that all of the funds in the Lazy Portfolios finally have a 10-year track record. So for the first time, he was able to review their decade-long performance, and the results were that all of them beat the S&P 500. Granted, the S&P 500 returned –1.59% over those 10 years, which means my chequing account was a better investment, and a large-cap US index is not an appropriate benchmark for a diversified portfolio. But in any case, most of the Lazy Portfolios managed to eke out gains between 2% and 5% during a decade that started and ended with massive crashes, which is a relatively good result.

The problem is that Farrell isn’t following his own advice.

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Would You Like Fees With That?

I’ve grown used to the antics of mutual fund companies and commission-based fund hawkers who criticize index investing. It’s predictable, pathetic and unlikely to change. What really disappoints me, however, is when the antics come from an investment company that I thought was one of the good guys.

Readers of this blog and my work in MoneySense know that I have often recommended the TD e-Series index funds for Couch Potato investors. They have the lowest MERs of any retail funds in the country, a long record of low tracking error, and the added benefit of being available online without a discount brokerage account. But this week I got an alarming email from Shannon, an investor in western Canada who is untangling herself from a large and notoriously expensive financial services firm. Shannon has decided to get started with index investing and, having read about the e-Series funds, gave TD a call. Here’s how she described the bank’s behaviour:

“First, we were encouraged to invest in regular TD mutual funds. When we said no, we wanted the e-Series index funds, we were told that the I-Series were just as good and could be bought at the branch.

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What Is the Advisor’s Role?

John Lawrence Reynolds’ newest book, The Skeptical Investor, argues that Canadians were badly served by their advisors during the crash of 2008–09. The book has all the wit and outrage of his previous screed, The Naked Investor, which is a favourite of mine. In some of his best lines, he describes money market funds as “a place to waste your money by paying other people to put it in treasury bills,” and says that buying bonds from a broker is “like shopping blindfolded in a foreign flea market where you don’t speak the language.” There’s even a cameo appearance by Preet Banerjee, the Spork-wielding creator of WhereDoesAllMyMoneyGo.com. So far, so good.

But I admit to being irked by the very first sentence of the book, which quotes a frustrated investor named Suzanne: “It seems to me that a financial advisor should be as good at telling you when to get out of the market as telling you when to get in.” Suzanne explains that in 2001 she poured half her retirement savings into just two stocks, both banks. The stocks soared until 2008, when she says she wanted to take some profits.

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