Taking charge of your RRSP doesn't have to be difficult.LEONID YASTREMSKYiSTOCKPHOTO
As RRSP season edges closer, Canadians will be looking closely at their portfolios, deciding on their contributions for this year and choosing what they'll invest in.
For Alison Griffiths, there's no contest in what investments the average person should choose. She recommends three low-cost, basic ETFs or index mutual funds: One bond, one Canadian equity, and one U.S. equity. Simple, easy to understand and easy to track.
The author of Count on Yourself: Take Charge of your Money says for the average investor, chasing mutual fund returns or trying to pick the best stock is futile, "quite simply because it doesn't work." (To read an excerpt from her book, click here.)
"Advisers tend to hate me for saying this but I see thousands of portfolios and by and large most of them are invested in mutual funds, and by and large most of them are underperforming the market and some performing quite horribly," she says.
Too many people have invested their hard-earned cash in investments they don't understand and are paying high fees for that "privilege."
"To me it's an issue not only of return … [but also of]keeping your portfolio comprehensible so you can understand it," Ms. Griffiths said in an interview from near Tampa, Fla., where the Canadian financial journalist spends part of the year.
Many Canadian investors may have a number of balanced, growth, and income Canadian equity funds in their portfolio without realizing they're all investing in the same stocks since there's only so much you can buy in Canada, she says. While mutual funds were innovative and levelled the playing field when they were first introduced in the seventies, she says, the times have changed.
"They're pretty much all the same and the fees are ridiculous, you pay 2.5 per cent or more annually – every single year – and up to three-quarters of them underperforms their benchmark index," she notes. "When you have this information … you've got to sit back and say 'Why am I doing it?'"
The mutual fund industry has convinced people that investing is "too complicated, too confusing; you'll mess it up and you'll be eating cat food in retirement," she says. "The fact of the matter is, it doesn't have to be that way."
"People are scared, they're afraid to make a wrong move which is why this ETF approach is very simple – the 'keep it simple' portfolio I'm proposing."
The popularity of low-fee ETFs and index mutual funds is rising. Between 2006 and the end of the first quarter of 2011, the size of the global ETF market more than tripled by number of funds to 2,605m, from 142 providers, and more than doubled by net dollar value of assets to about $1.4-trillion (U.S.), according to a recent study by ETF provider BlackRock. ETFs have been around since 1990.
Ms. Griffiths, who has an economics degree and has written a number of personal finance books, decided passive investing was for her after stumbling badly with a number of advisers.
In her and her husband's newspaper column in the late nineties, they gave several advisers an imaginary pot of cash and tracked how their investments performed. One was the Easy Chair portfolio, a passive portfolio comprised of 20 per cent cash, 30 per cent bonds, 35 per cent Canadian equities, and 15 per cent U.S. equities. It's "staggering" to see how well that portfolio has done over the years, she says.
"If you can invest cheaply, buy something you have a shot at understanding, and it does as well as a whole bunch of confusing mutual funds, why wouldn't you do it?" she asks.
"It was a real revelation to me back in the late nineties when I saw how few experts were able to consistently beat the market over time – and that's what you pay for."
Over the past 20 years, the conservative Easy Chair portfolio has a return of 8.6 per cent before trading fees. A moderate and a more aggressive passive portfolio both have had an 8-per-cent return. Most advisers currently use an estimate of 5 per cent or 6 per cent when they're predicting the long-term return of a portfolio.
And with the hype of RRSP season about the begin in full force, Ms. Griffiths says investors need to first determine if adding to their RRSP is the right move, then evaluate what's already in their portfolio before buying an investment.
To follow her passive investing approach, there are only three steps involved. Pick your correct asset allocation based on your age and your risk tolerance, choose the broad ETF or index funds to fit your allocation, and make the investment either through an adviser or a discount broker.
"I think virtually everybody of every age will do fine with one U.S. ETF, one Canadian ETF, and one bond ETF. Three simple investments," she says. For the cash side, that can be a GIC that's automatically rolled over.
"That's it. How simple. Dead simple."
RRSP 2012 ONLINE DISCUSSION
Bestselling author and award-winning financial journalist Alison Griffiths joined us to answer your questions about building the right RRSP in a live chat.
For a mobile-friendly version, please click here.