I’ve gone through various mutual fund companies and financial planners over the years, but ultimately decided last year to take my finances into my own hands and manage my own portfolio.
My main issue with the financial planning/advice market is that there is an inherent conflict of interest in most of the advice given out. Yes, a par-life plan may in fact be a great investment vehicle, but when your purchase of one results in a $1,000 bonus for the financial planner, how can anyone ever be sure that the advice was given solely because it was in your best interest? Also, most mutual funds have trailing fees build in, which are effectively sales commissions that go back to financial planners who sell them. The majority of mutual funds presented to clients of financial planners have MER (management expense ratios) of between 1.5% – 3.0%, with the majority (in my experience) being around 2.5% in Canada. That means that if the market completely flat lines for an entire year, you’ll lose 2.5% due to management fees, some in the form of trailer fees, and others for the mutual fund manager who manages each fund.
Now, I’m not saying financial planners don’t deserve to get paid, because they do. In fact, that model may in fact appeal to people who are in such a financial mess that they wouldn’t have the ability to pay a financial planner directly. So, there are definitely benefits to a model where you don’t have to pay anything up front. It’s just not the one I prefer these days.
If I were to go back to a financial planner (and it may happen in the future), I would definitely choose a fee-only planner, that is someone who doesn’t receive commissions on any of the products they recommend. Most work on a percentage system, i.e. 1% of the value of your entire portfolio. That may seem like a lot, but many fee-based planners spend the time to check into and rebalance your investments from time to time, which takes time and effort, proportional to the amount of assets you have. Due to the lack of a conflict of interest, it’s a lot easier to trust their advice as well, which I think is how it should work. Another benefit is that as a professional fee, it’s a tax write off. So if you are in the 43% tax bracket, that 1% becomes more like 0.57%.
That said, I manage my own finances these days. Last year I looked into the mutual funds with the lowest fees, and almost unanimously people recommended TD Financial’s Index funds, which is my main retirement vehicle. Index funds work on the promise that nearly all managed mutual funds under perform the market, due to the high expense ratios of the products. So, if a mutual fund charges 2.5% in management fees, it stands to reason that it will almost always under perform the market due to that amount of money being taken from the fund.
Index funds work on the reverse concept – that is, if most managed mutual funds under perform the market (as measured by the major indices, such as the S&P 500), it makes far more sense to simply buy these indices directly. Since the S&P 500 index is simply the top 500 companies in the US market, there’s no real management associated with the fund, since the allocations only change when a company drops out of that list or moves into it. As a result, the management fees for index funds are often negligible (some index funds in the US have an MER of around 0.06% – peanuts).
My main allocation looks like this:
Canadian cash (in a money market fund) – 5%
Canadian Index fund (tracking the TSX) – 30%
Energy Sector (tracks energy based commodities) – 15%
Precious Metals (tracks silver and gold primarily) – 15%
US Index fund (tracking the S&P 500) – 15%
Japanese Index fund – 5%
European Index fund – 5%
Canadian Bond index fund – 10%
So about 85% of my portfolio is higher risk, with about 15% being low risk (cash and bonds). I used to be adverse to holding cash in my portfolio, but I’ve actually made good use it of a few times. For example, I’m a big believer that gold and silver are going to continue to increase in price. The last few weeks have seen a big sell off in silver, with the price dropping from about $30/ounce to around $27/ounce. While many people started selling, I logged into TD and bought a bunch more, bringing the weighted cost of that portion of my portfolio even lower. When I make my contribution next month, I’ll simply leave it in cash to bring the cash portion of my portfolio back into line with my targets.
One of the aspects of managing your own portfolio is that it periodically needs to be rebalanced. For example, if precious metals do extremely well, at some point the target allocations listed above get out of whack, and the portfolio takes on another element of risk. For the most part, I try to rebalance with my monthly RRSP contribution. So, if I buy $600 a month in RRSPs, I use that to bring the ratios back in line with where I want them. If that’s not possible, I generally hold out for a few months and then rebalance the portfolio manually (by selling items that are higher than my targets and buying items that are lower than my targets). This has the added benefit of forcing you to sell when something is high and buy when it’s low, the proper strategy but one that very few people do (people tend to want to buy sectors when everyone else is buying, and sell them when everyone else is selling). If you’re looking to rebalance your own portfolio, try this free online portfolio rebalancer.
The precious metals above are represented by precious metal stocks, most in the form of mining companies. At some level it acts like a leveraged investment against the real price of precious metals, which is good and bad. Ideally I’d like that portion of my portfolio to be actual physical metal (since I really don’t trust the fact that you can buy paper certificates representing metal in vaults – that seems no safer to me than fiat money in general). I actually bought my first physical silver a few months ago, and would like to continue accumulating it as I get older (partially because I think it’s a good investment, but also because it’s pretty wicked cool to hold a bar of 99.9% silver in your hand!)
I also have a few other strategies, but I’ll save those for another day. In terms of fees, my weighted expense ratio on my portfolio is around 1% right now, mostly due to the higher MER for the Energy sector funds as well as precious metals. Once my portfolio grows a bit larger, I’ll probably switch those to ETFs, since they have much lower fees and ultimately represent the same part of the market I’m after. But with the added transactions costs of ETF purchases, it doesn’t make sense for me at this point in time to switch those over. Maybe in another year or so.
I haven’t made much use of my TFSA yet, although I do have an account with a small amount of money in it. I’m in the process of changing that though, since I like the idea that a TFSA is easily accessible in an emergency situation (there’s no tax hit if you need to dip into it). So I may hold off on the RRSPs for a year or two and try to max out my TFSA room. That makes a lot of sense to me, especially while I’m traveling – I may need access to fast cash if I ever get into a bind somewhere.
But that’s the low down on my current registered investments. Everyone has different strategies and allocations, so by all means drop some comments below and let everyone know what you are doing, or what your experience with saving for retirement has been, with or without a financial planner.