It's possible to make a reasonable argument that the average investor would be better off investing in GICs than stocks and bonds. Unfortunately, David Trahair fails to make this argument well in his book Enough Bull: How to Retire Well Without the Stock Market, Mutual Funds, or Even an Investment Advisor. So, I'll try to make it for him.
The main argument in favour of investing in stocks is their higher expected returns (called the risk premium) than guaranteed investments like GICs. However, the typical Canadian investor working with a financial advisor is invested in balanced mutual funds (half stocks and half bonds) and pays yearly fees in the 2%-3% range. To these fees we can sometimes add front-end loads and deferred sales charges. On top of that we can add the losses that come from panicking and selling at the wrong times.
Taken together, these costs eat up the risk premium. This type of investor very likely is better off with bank GICs as long as they are held in tax-advantaged accounts and the investor learns to negotiate for the best possible GIC interest rates.
Where this argument falls down is that there is another approach to investing that doesn't involve giving away your risk premium to financial “helpers”. It is called indexing. Just take your retirement savings and buy a mix of low-cost index funds. Returns will be more volatile than GIC returns, but they are very likely to be higher over the long run as long as you don't panic and sell your index funds when they are cheapest.
So, Trahair is right to compare GICs favourably to high-cost mutual fund investing, but wrong to suggest that GICs beat the simple indexing approach. The main failing of his argument is that he ignores the dividends that stocks pay. This is like saying I'm a better basketball player than Kobe Bryant if he doesn’t use his hands.
For the rest of this review, I’ll look at a few specific parts of the book.
It's different this time
Right in the first paragraph, Trahair makes the oft-repeated mistake of thinking that things are different this time: “The old rules regarding personal finance are now history, as in obsolete”, due to the 2008 stock market drop. Long-time investors know that recent history is not a good guide to the future.
When it comes to answering criticisms of the 100% GIC approach, Trahair calls discussions of inflation a “red-herring”. It's true that inflation affects all investments, but we should be looking at real returns (returns after taking into account inflation). When Trahair implores you to “sleep at night knowing your investments will NEVER decline”, he is ignoring the fact that GIC investments can decline in terms of real purchasing power if inflation exceeds the GIC return.
To support the idea that today's very low GIC returns may rise in the future, Trahair points to the past: “Do you know what annual interest rate a GIC was paying in 1980? It was 12.36%.” Well, inflation was 10% in 1980. Many investors who had to pay income taxes on GIC interest lost purchasing power. What matters is the difference between GIC returns and inflation.
Trahair compares historical GIC returns to historical increases in the S&P TSX Composite Index of Canadian stocks, but the problem is that this index does not include the dividends from the companies making up the index. This error alone casts doubt on the author’s competence to advise people about investing.
Personal Investing Experience
The book contains a detailed account of the author's own experience investing in equities, which was dominated by Labour-Sponsored Investment Funds (LSIFs). LSIFs are known to be very risky. Governments have had to entice investors with tax breaks to generate interest in LSIFs. Investing in low-cost equity index funds is a very different game.
Advice on Stocks
Due to the stock market performance of 2008, Trahair says “Here's my advice: get out of equities altogether if you can.” Since the end of 2008, the S&P TSX Composite Index of Canadian stocks has gone up about 37% (including dividends). Nice call.
Trahair has a point that the typical mutual fund investor could do better. However, better means a low-cost indexing approach rather than hiding from the world with 100% of long-term savings in GICs.
Other reviews of this book:
Canadian Dream: Free at 45