Stop Investmentism!

There are many bad “isms” in the world.  Racism, categorizing individuals into one common stereo type because of their race.  Sexism, prejudging a person solely based on their sex.  Ageism, assuming that someone because of their age will act as others of the same age. In the investment world, it is no different, “investment-ism” cases go unnoticed and unreported every day and without the ability to speak, individual investments get boxed into their investment category misunderstood and ill-treated.  This growing epidemic of investment-ism must stop.

Let’s debunk a few common investment-isms that seem to capture the headlines today.

“You can lose everything in Stocks”

This is an old one.  A stock is part ownership stake of a company, therefore it depends on the company itself if it is extremely risky or very conservative.  Bell Canada (BCE Inc.) is an example of one of those more conservative type companies.  It has been around since 1880 and has consistently throughout that time.  They are involved in fixed line and mobile telephones, internet services, digital television, radio broadcasting, print and sports and entertainment.  They generate $21 billion dollars in revenue annually and pay investors over 4% of their investment in dividends (portion of company profits) just for owning shares of the company.  While stock prices do fluctuate, the only way you can lose all your money is if the company goes bankrupt.  Bell has been around since before the Titanic, but unlike the Titanic it will take more than an iceberg to sink this ship!

“Mutual Funds will lose you money”

There are thousands of mutual funds in Canada, some that are very good and some that are very bad.  Some that are very risky and some that are very conservative.  A mutual fund is simply a portfolio of investments with a set mandate, investment objective and risk objective.  This portfolio can consist of stocks, bonds, GICs, options, real estate, even mortgages depending on the mandate.  A big knock on mutual funds is that they are viewed as expensive, with fees averaging around 2%, which are higher than the average Exchange Traded Fund (ETF) of around 0.4%.  The first thing to understand is what goes into the fee.  It is comprised of a management fee that for the fund manager and the investment team, transactional costs, administration costs and a fee is also paid to the advisor (this may be included in the management fee or charged separately).  The question would be what price would you pay for the service that you are receiving?  Mutual Fund managers have two goals: 1. Beat their respective benchmark and 2.  Do it with less risk than the benchmark.  There are mutual funds out there that give the mutual fund industry a bad name, but there are mutual funds that have outperformed their benchmark and are doing it by taking less risk.  Because they typically take less risk, mutual funds will often under perform in really strong years and over perform in weak years.  A good example of this would be the Dynamic Equity Income Fund, this investment management team has been together for 15 years and have managed to outperform their benchmark (returning 11.4% since inception in 2001)* as well as protect against the downside in very difficult years (their only negative year being 2008).  If you were to compare this the Toronto Stock Exchange which has had negative years in 2001, 2002, 2008, 2011 and 2015. This shows, that just like all types of investments, it is important to look under the hood of an engine and understand the dynamics of your investment.

“Exchange Traded Funds cost less therefore the cost savings will produce a better return”

Exchange Traded Funds (ETFs) are an excellent way to diversify yourself, like mutual funds. They are low cost and can help you achieve a portfolio of stocks or bonds that would otherwise be impossible to accomplish in most people’s accounts.  Generally, ETFs try and replicate either an index or a sector.  An ETF would purchase everything in the index or sector to replicate the performance of that area, with this you get both the good and the bad.  When the market is performing well generally the index will move in one direction and you would receive the benefits of that, but also when the market is moving down you will receive the full brunt of it.  Recently, they have added ETFs that have additional levels of sophistication with the introduction of rules based investing.  This layer gives investors more reason to make sure they know what they are buying as all these strategies were built on past performance and my not be replicated in the future.  Overall, ETFs are an excellent tool when monitored properly but get careless and you will also receive the bad side of the ETFs.

A complete portfolio may include a combination of stocks, ETFs and mutual funds, amongst other investments.  Not one of these investments are entirely the best nor are they the worst.  A smaller portfolio could not be diversified properly with only using stocks. It may also make sense to use an experienced mutual fund team when venturing into to purchase investments that you may know little about, for example buying in companies in a different part of the world like India, opposed to purchasing an India ETF.  An ETF may provide similar exposure as a mutual fund, but it will buy the good and the bad companies of an index you may know little about. However, if you use an ETF to gain exposure to areas you do understand, it provides value when accessing the markets in lower fees that would make you more money in the long run.

The bottom line: Even though an investment may share the same name or structure, every individual investment is different just like every investor is different.  What is a good investment for one person may not make it a good investment for everyone else.  So stop Investment-ism and get to know the real investment inside.

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*Forward Looking Statements
Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by author. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.
These estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.