Aug
22
Another financial advisor has inveighed against do-it-yourself (DIY) investing. First, it was Avner Mandelman; now it’s David West. What they argue may perhaps be true of DIYers with an active approach, but not so for the growing ranks of DIYers with a passive indexing approach.
Blogger Canadian Capitalist took Mr. Mandelman to task on this point in his July 22 post; what CC said also seems applicable to Mr. West’s thesis. And as the creators of MoneySense’s Couch Potato Portfolio have said all along, buying and holding broadly based index funds and/or exchange-traded funds takes “only 15 minutes a year” and “will beat “about 80% of the money managed by professionals.”
How so? Markets are efficient. So financial managers and advisors are able to deliver no better than the market average over time. But after deducting their fees, they will underperform the market by 1.5% to 2.5% a year. Simply holding an index fund will yield the market average at a lower cost, between 0.3% and 0.6% a year. Over the long run, keeping fees low adds up big time.
Some of the best index funds in terms of cost, as CC has noted, are the TD eFund family. Blogger wheredoesallmymoneygo.com also recommends the DFA family of index funds. Providers of exchange-traded funds in Canada include iShares and Claymore Investments.
8 Responses to “ DIY investing under attack ”
Much obliged for the mention - have a great weekend.
By WhereDoesAllMyMoneyGo.com on Aug 22, 2008
David West’s argument falls down on two points. The first is your point about losing to the index. The second is that most financial advisors are salespeople who actually know rather little about investing.
By Michael James on Aug 22, 2008
MJ
Maybe some other points can be added too. One is conflicts of interest (e.g. incentive to recommend funds with trailer fees rather than funds without them). Another is academic research showing that it may be a myth advisers keep investors from “buying high and selling low”
LM
By Larry MacDonald on Aug 22, 2008
I gave up on a financial advisor who said, “when I started out I couldn’t afford to put you into the best funds”. They are salespeople looking for a large client base.
By tom smart on Aug 23, 2008
Hi,
I’m a DIYer mainly, but actually I like David West’s column. I’ve found it quite useful from time to time. I think he is trying to say that there are a lot of people out there who have no idea what they are doing. Reading various discussion forums and watching the erratic and meaningless rise and fall of stocks, I have to agree. If they can’t see their way to paying an advisor, at least get some basic education. That is his message, I believe.
REP
By REP on Aug 24, 2008
The irony is, nowadays the smartest stuff I see, is coming out of the blogs.
http://truthortalk.wordpress.com/
By Truth or Talk on Aug 24, 2008
Thanks for the mention. If the maxillofacial guy is a passive investor who can construct a diversified portfolio and keep fees and expenses down, I’ll pick him anyday over a guy who has been “studying” the markets 50 weeks a year for the past 20 years.
By Canadian Capitalist on Aug 26, 2008
Hmm, it’s a bit hard to pick apart Mr. West’s argument because it’s all just opinion. Nary a fact, study or statistic about the performance of individual investors sullies his article.
Last October I came across and blogged an article that showed that serious DIY investors performed better than the market - see http://canadianfinancialdiy.blogspot.com/2007/10/individual-investors-can-outperform.html.
At the same time, John Bogle has documented the serious under-performance of individual investors compared to the under-performing mutual funds in which they invest, mainly because of performance chasing. see http://money-and-investing.dogberrypatch.com/archives/bogle-on-selecting-mutual-funds-costs-matter/
So it isn’t a given that either the individual or the pro will do better. Like CC, I tell anyone who will listen that it is easy and sure to go the index route. It’s dull but effective over the long haul.
By CanadianInvestor on Aug 26, 2008