Investing on the cheap
Paying high fees to financial advisers isn’t sole way to make money. Investors have more choices than ever to build a portfolio
I ditched my financial adviser about a decade ago and started investing on my own. I was fed up with paying high fees for underperforming mutual funds. Dividend-paying stocks were growing in popularity and so I decided to take the plunge and build my own portfolio of blue-chip companies.
Several years later, I realized my folly: It’s hard to pick winning stocks. It’s even more difficult to consistently pick winners and avoid losers over the long term. Overwhelmingly, the academic research showed that passive investing using mutual funds or exchange-traded funds (ETFs) has a better chance of outperforming active investing that focuses on stock picking and market timing.
I bought into the research, sold my dividend stocks and set up my new investment portfolio using two low-cost, broadly diversified ETFs.
Today, investors have many more choices available to build their own portfolio on the cheap. I’ll show you three ways to lower your investment costs, diversify your portfolio and reduce the time you spend worrying about investing. 1) Use a robo-adviser. A traditional financial adviser or wealth manager might cost an investor between
1.5 per cent to 2.5 per cent in management fees each year. Then along came robo-advisers to disrupt the portfolio management model and drive down costs to less than 1 per cent.
Arobo-adviser helps you build a portfolio based on your risk tolerance, experience and time horizon. Once your model portfolio is built, all you have to do is make regular contributions and the robo-adviser will allocate your cash into the appropriate investments.
The robo-adviser takes care of rebalancing your money whenever the portfolio drifts away from its original allocation (due to market movements or from your own contributions).
Competition is heating up in the robo-adviser space, with the likes of Wealthsimple, Nest Wealth, Justwealth, ModernAdvisor, Questwealth and WealthBar all vying for your investment dollars. BMO SmartFolio has been around for a while and more recently RBC launched its own robo-platform with RBC InvestEase. 2) Invest in index funds. An index fund tracks a stock or bond market and aims to deliver market returns, minus a very small fee. All of the big banks offer index funds, typically at half the cost (or lower) than their traditional equity or bond mutual funds.
One popular set of index funds is TD’s e-Series funds. These funds can only be purchased online, but they offer tremendous savings over their actively managed mutual fund cousins. Investors can find e-funds for Canadian equities, Canadian bonds, as well as U.S. equities and international equities, all for fees of about 0.5 per cent — or less.
Another solid set of index funds comes from Tangerine’s Investment Funds. These are one-fund solutions that come in five flavours — with the traditional 60 per cent equities, 40 per cent bonds balanced portfolio being its most popular.
The expense ratio on Tanger- ine’s funds comes in at 1.07 per cent — higher than TD’s e-Series funds, but still a bargain compared with the industry average.
Investors who use dollar-cost averaging and make regular contributions throughout the year should consider index funds over ETFs. That’s because investors can buy and sell mutual funds without incurring any commission charges or fees, whereas ETFs may be subject to trading fees, depending on your broker. 3) One-ticket ETF solutions. It’s never been easier to build an extremely low-cost and globally diversified portfolio with just one investment product. The one-ticket ETF solution was first introduced to Canada last year by Vanguard. Since then, Horizons ETFs and iShares have all launched their own suite of all-in-one balanced ETFs.
Vanguard offers five of these ETFs, each with a management fee of 0.22 per cent. The most conservative allocation is 20 per cent equities and 80 per cent fixed income, while the most aggressive has 100 per cent allocation to equities.
Horizons lists two balanced ETF portfolios — one with a 50-50 split between stocks and bonds, and the other with 70 per cent equities and 30 per cent bonds.
The management expense ratio on these funds is 0.17 and 0.18 per cent, respectively.
Finally, iShares launched two of its own one-fund ETF solutions — one with a traditional 60-40 split between equities and fixed income, and the other with 80 per cent equities and 20 per cent fixed income.