Recent Buy – Seg Funds

My employment situation changed recently and as part of the compensation package, I was offered RRSP (Registered Retirement Savings Plan) match on ongoing contributions. This sounds great, but the annoying part has been the fact thatthe plan is administered by an insurance company, and I need to pick from their segregated funds – all of which have exorbitant management fees.

So that I don’t leave money on the table, I decided to sign up and will be making regular contributions on a bi-weekly basis.

Of the funds available, nothing looked great – but I had to pick atleast one. So after a lot of debating, I decided to simply go 50-50 on US Equity Index and International Equity Index funds. Both these funds use Toronto-Dominion’s (I am already a TD shareholder — so, good to see my holding offering competitive products 🙂 ) mutual funds as the underlying funds.

  • The US Equity Index Fund is essentially a S&P 500 tracker and has an MER of 0.383%
  • The International Equity Index Fund tracks developed market companies ex-North America; and has an MER of 0.491%

Those MER rates are high for essentially an index fund (The other funds had even higher MERs!), but like I said – I had to pick some investment to take advantage of the employer matching.

These are front load funds – so, the charges are applied up front and I can sell them whenever I want. Upon further querying the plan administrator, I found that I get one free sale per year and all subsequent sales will incur a $50 admin fee penalty. For now, I will let the funds collect and grow. I will probably revisit in a year and possibly sell to move the funds to my self-directed RRSP investment account in order to avoid compounding of the management fees.


Recent Sell – Mutual Fund

After being a goal for long time, we finally sold majority of my wife’s expensive mutual fund holding. The fund in question is Scotia Canadian Balanced Fund, which had an expense ratio of 2.04%. That number is nothing to sneeze at and the expenses pile up over time. More details on this below. Going forward, we will be balancing our portfolios better integrated so that we align closer to our combined goals.

Why Sell?

  • Expensive fund: The fund is extremely expensive at over 2%. Two percent is a large amount of money for what is simply an index tracking fund. To put things into perspective, for every $10,000 invested, that results in $200 per year. Over the course of next 30 years, that is $6,000. Now multiply that by every $10,000 invested in the fund and you will notice how the expenses can get out of hand!
  • Lack of diversification: Another important factor in selling this fund is the lack of diversification. The fund is invested completely in the Canadian market (55% in stocks and 45% in bonds). While the stock/bond diversification is good, we are exposed too highly to one country (Canada) and any recession or economic hardship hitting Canada will result in serious under-performance and loss of our hard earned money.

Investment Strategy

We will be using the cash from this sale to invest in index funds via ETFs. ETFs are a lot more inexpensive (its not uncommon to find a fund tracking S&P/TSX for 0.05%) and we will also be picking more than one or two funds to achieve some diversification in exposure to both stocks and bonds. We are also planning on keeping things simple so that my wife can maintain the portfolio going forward. Overall, the plan is to maintain a simple diversified index fund based portfolio in my wife’s account while I invest in individual stocks of blue chip companies.

In the coming days, I will be posting details of which funds we will be picking for the investment in this account. Stay tuned!

Recent Sell – Mutual Funds

This post has been overdue for a few days now. For people familiar with my portfolio, I have owned two mutual funds over the past few years and have been intending to sell them to reduce my overall expenses. It has been on my list of goals, but due to the extraordinary returns over the last couple of years, I kept my positions open and profited well from the investments. I have finally pulled the trigger and closed my positions in the two mutual funds.

  • CI Global Health Sciences Fund – not cheap by any measure with an MER of 2.46% has been one of my best performers in the recent years. The growth of this fund has been staggering with a whopping 61.8% return in 2013.
  • CI Signature High Income Fund – had  a more tolerable 1.6% MER, which is still expensive compared to other products out there in the ETF market. The fund provided me with good income over the past few years yielding about 4% and capital gain returns of 8.46% in 2013.

Why Sell Now?
My wife and I intend to buy a house sometime this year and the plan has always been to use these funds as part of our down-payment; so moving these funds into an all-cash position was long overdue. It is common advise that money needed in the short-term should not be invested in equity markets and I agree with that viewpoint. The equity markets can be quite volatile, and investors should always be ready to face the consequences of losing part of their investment in the short term. Even though, we are currently in a bull market, we are starting to see some volatility return while the Fed slowly removes the crutches by tapering the bond buying program. While the markets are still at the all-time high, I have decided to take the profits move that portion of my portfolio into an all-cash position.

Obviously this affects my passive income stream significantly. But unfortunately, I am not done funding my down-payment yet. I intend to sell a few more holdings from my portfolio in the near future. This is one of the reasons I have been trying hard to build my other streams of passive income over the year in order to reach my goal of $4,000.

Portfolio Diversification
My Portfolio diversification has changed quite a bit after selling the two funds. The High Income Fund was a diversified fund, so overall that does not affect my diversification, but the sale of Health Sciences Fund drops my healthcare asset allocation from 17.4% to 2.9%. Now, I have rebuild that position all over again.

Disclosure: My full list of holdings can be found here.


A Scam Called Mutual Fund

If there is any universal piece of advice in the investing world, it should be – “Stay away from mutual funds”.
Mutual funds come with a a little hidden number called MER – the Management Expense Ratio – which looks measly to begin with ranging from 1%-3% (some mutual funds may be as high as 5%).

Do not get fooled by this number because this number is a recurring annual fee and is taken off the overall returns of the fund, so you never see it anywhere on your semi-annual or annual statements reminding you that you just gave a major part of your savings to the fund company.

The Solution

  1. If you are looking for diversification without picking individual stocks, invest using an ETF – Exchange Traded Fund. The ETF fees normally vary from 0.05% to 0.8%. 
  2. A better option is to build your own portfolio. You pay a one time trading fee and no other recurring fees. You have two options – either direct investing via a DRIP plan or through an online discount broker.

Use Case

To best illustrate my point, lets assume you decided to invest in a mutual fund:

  • Initial investment: $10,000
  • Subsequent investments: None
  • Rate of investment return: 5%
  • Mutual fund MER = 2%  (which is a conservative estimate of the funds available in the market).
  • ETF MER = 0.5%
  • Stock investing via DRIP – assuming you buy 10 companies and setup direct investing – the only expense would be the cost associated with obtaining the first share from your peers (which is usually $10).
  • Stock investing via discount brokerage – assuming you buy 10 companies and a trading fee of $4.95 per trade (as offered by Questrade).
Mutual Fund Fees ETF Fees DRIP Investing Brokerage Fees
After 1 year $807 $52 $100 $49.50
After 5 years $1,444 $315 $100 $49.50
After 10 years $2,605 $796 $100 $49.50
After 20 years $6,849 $2,530 $100 $49.50

ETF fees also add up over time, but no where near the rate of mutual fund fees. So, if you are looking for diversification with a fund, it is no brainer to choose ETFs.
If keeping your fees down is your ultimate goal, direct investing either via DRIP or online discount broker is your best option.

If you own mutual funds and wish to find out how much your funds are costing you, click here for a great tool.

Disclosure: I owned about 6 mutual funds until I started realizing the snowballing effects of the fees. I have started trimming them down and currently own two mutual funds. I am hoping to cut back on those two funds in the near future.

Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.