‘Bogleheads’ is a name coined for investors who favor index investing as inspired by Vanguard Group founder John Bogle.Jupiterimages
With thousands of funds to choose from and "diversification" being every financial expert's preferred term, it's no wonder that so often people end up putting their money in too many vehicles. Should more Canadians be joining the "Boglehead movement" that's gaining traction south of the border?
Canadian money mavens say no.
Bogleheads, who take their name from Vanguard Group founder John Bogle, favour index investing. Many take a less-is-more approach, suggesting a portfolio should consist of three low-cost funds. Proponents say the concept is simple to understand and maintain, in addition to being prudent and well-balanced.
"I agree you can be too diversified, but I strongly promote diversification in these uncertain times," says J. Angus Watt, managing director of individual investor services at Edmonton's Angus Watt Advisory Group at National Bank Financial. "The question is really about one's plan and priorities.
"In 2008, some of the biggest train wrecks were people in ETFs [exchange-traded funds]," he adds. "You have to be diversified because we don't know what the winners or losers are going to be in the future." (From 12 advisers contacted across the country, Mr. Watt was one of just three who agreed to be interviewed on this topic.)
Hypothetically speaking, however, if Mr. Watt had to pick three funds only, he'd go with those from Picton Mahoney Asset Management.
"Two funds that jump out at me in reducing clients' risk are the Picton Mahoney Long Short [Equity] Canadian fund and [Picton Mahoney] Income Opportunities fund, which is global. It's a hedge fund, and hedge funds are like snowflakes: No two are the same," he says. "They're hedged against currency. Some people, when they think of hedge funds, they say, 'Oh, that's a little risky,' but you need to look at performance."
"For my third fund I could go with a newer [Picton Mahoney] fund, which would be the Natural Resources fund. It's made money this year even though when I take look at base metals, gold stock, oil and gas stock, they have just been clobbered. … If I wanted to stay with a hedge fund, those would be the three I'd probably pick."
If, by contrast, someone wanted a three-fund portfolio that did not consist of hedge funds, he'd start off with the PIMCO Monthly Income fund.
"You cannot ignore the bond market in my mind," Mr. Watt says. "You have to own some bonds, because if it hits the fan, then you need some security. You might as well have the largest or one of largest or one of the very best managed bond portfolios and not one that's narrow in scope where it's just looking at Canada or North America purely. A lot of these funds, when they get big, it gets very difficult to manoeuver, and when they go to do something it causes great pain in the marketplace – so they don't do anything. It's a challenge, and it's something you have to take into consideration. That's the criticism when you pick a large fund manager such as PIMCO. On the other hand, there's the opportunity of building in a billion dollars' worth of bonds into your portfolio at a good price."
Along with PIMCO he'd add a smaller retail client, something akin to RBC [Private] Canadian Growth and Income fund or Fidelity Canadian Large Cap, the latter which is nearly half and half Canadian and U.S.
"You cannot have an economic recovery without the U.S.," Mr. Watt says. "At the same time, you want to be in a Canadian bank stock in case rates go higher."
For those still keen on sticking with three funds, Mr. Watt urges people to do their research and find those that are well-managed.
"We're vulnerable to volatility; that, in my mind, has to be a given," he says. "We've seen in the last two months in the bond market and we've seen it happen in the price of gold and we've seen the price of oil show some surprises.
"If you're going with three funds you need three managers that are best in class; then you're going to be a lot further ahead."
Those who like the idea of simply owning index funds because of the low cost need to be cautious, says Vancouver's Lori Pinkowski, portfolio manager and senior vice-president, private client group, at Raymond James-Pinkowski-Allen Financial Group. "They are like any other investment and need to be actively managed," Ms. Pinkowski says. "For example, if you bought a US Equity index in 2000 it would have taken you almost 13 years to make any money on it. I can't imagine investors would be happy with that.
"I disagree with almost everything about the Bogle approach but agree with one thing: Many investors are overdiversified with their investments, leading them to poor returns overall," she adds.
She points out that while some Bogle combinations consist of just three ETFs – such as a U.S. equity, a bond and an international index fund – they actually contain as many as 15,000 global securities within them, an obvious sign of drastic overdiversification. There is no risk management strategy in place, either.
"If the stock market has a significant drop such as in 2008, your index funds are going to plummet unless you have an exit plan in place," Ms. Pinkowski says.
When it comes to investing, it's important to review costs, she says, but it's also vital to have a solid risk-management strategy in place and to review returns after fees.
"Markets have been and will continue to be volatile, so buying three index funds won't be the answer to making money for clients in these market conditions," Ms. Pinkowski says, noting that in addition to the Pinkowski-Allen portfolios her firm runs directly, it also uses the Barometer High Income and Sentry Equity Income portfolios.
"The buy-and-hold Bogle ETFs approach would have been great in a bull market like the '90s, but their strategy is hazardous to your financial health in today's volatile market," she says.