Thursday, December 11, 2014

Money Rules for Investing

Gail Vaz-Oxlade’s book Money Rules covers so many financial topics that I decided to start by reviewing just the parts related to investing here. The bulk of the book offers excellent advice to those who need help controlling their spending, but the advice about investing is weak.


The most puzzling section is a tirade against those who seek lower Management Expense Ratios (MERs). She correctly observes that MER is just “financeeze for ‘fee,’” and goes on to say “Why the hell we have to use three words instead of one and then shorten those three words to an acronym is beyond me.”

Mutual funds aren’t exactly known for clearly explaining their fees. MER has a precise definition about what costs are included and how it is disclosed. Without these rules, mutual funds could just classify all sorts of costs with names other than “fees” and then claim that their “fees” are very low. At least the few investors who’ve heard of MERs have a chance of understanding what fees they are paying.

Vaz-Oxlade goes on to say that those who try to minimize MERs “don’t really understand what’s going on and are just blathering on because they enjoy the sound of their own voices.” She says trying to minimize MERs may or may not be the right choice.

“If you buy a mutual fund that has a MER of 2.5% because it’s actively managed (yes, that costs more) and it gives you a return of 9%, and you buy another mutual fund with a MER of only 1.5% and it gives you a return of 7%, which one did you do better on?”

Obviously, the first mutual fund worked out better, but this logic reminds me of a quote often attributed to Will Rogers: “Buy some good stock and hold it till it goes up, then sell it. If it doesn’t go up, don’t buy it.” There’s an obvious temporal problem with needing to know if the stock will go up before you buy it.

Vaz-Oxlade’s logic has a similar temporal problem. You can see past mutual fund returns, but not future returns. And she says herself that past performance is not a good predictor of future performance. So, we don’t know at the time we buy a fund what the future returns will be. Great past performance means little. We can’t invest in past returns; we can only get future returns. We’d like to think we can figure out which will be the good mutual funds, but we can’t. The best predictor of good future returns is a low MER.

In another attempt to justify high MERs, she says “If you’re paying 20% in fees and earning a 40% return, you’re still up 20%. Did you really think a 20% return would come without a hefty price tag?” This perpetuates the myth that you get what you pay for in money managers. The truth is that active money managers as a group do not earn extra returns that exceed their fees. We’re used to the idea that you pay more for higher quality. A 2.5% MER mutual fund must be better than a 1.5% MER mutual fund, right? All the evidence says this isn’t true. Lower MERs are strongly correlated with higher returns.

Financial Advisors

Vaz-Oxlade says she has an investment guy, Patrick, because “Hey, do I look like I have time to keep my eyes glued to the markets?” This perpetuates the myth that the main value of a financial advisor is to pick investments. This isn’t true. Any fool can buy some index funds and get better long-term returns than almost all investment professionals as long as the fool stays invested for the long term.

The real value of a good financial advisor is providing tax planning, estate planning, helping you stick with an appropriate asset allocation, etc. Expensive mutual funds have an interest in making us believe that only they can navigate the rough seas of investing, but this is nonsense. Investing has risks and professionals can’t make these risks disappear. Financial advisors can’t consistently sniff out market declines in advance.

Investing Horizon

The book divides investment horizons into three categories: less than 3 years, 3 to 10 years, and greater than 10 years. Only investors whose horizon is longer than 10 years are advised to buy stocks. Most commentators set a limit of 3 to 5 years, but a 10-year time horizon for stocks may be reasonable for conservative investors.


Vaz-Oxlade correctly explains that borrowing to invest is not a good idea for most people. “One of the most deceptive techniques used to demonstrate the benefits of leveraged investing is to use the historical performance of the market as a whole to compare a non-leveraged and a leveraged investment portfolio.”

This is true. But her explanation is nonsense: “Problem is, no one ever ‘buys the market’—even indexed investing isn’t the whole market—so the example is a red herring.” Good index funds track market averages very closely. Here are some real dangers of leverage:

1. When stocks drop you might lose you nerve and sell locking in a big loss.

2. When stocks drop you might get a margin call forcing you to sell stocks at a steep loss.

3. The advisor talking you into using leverage has no intention of investing your money in inexpensive index funds that give returns that match the market. Rather the advisor intends to invest your money in expensive mutual funds that pay fat fees back to the advisor. These fat fees greatly increase the risk that a leveraged portfolio will perform worse than a non-leveraged portfolio.

Mutual Fund Averages

Vaz-Oxlade says that “mutual fund averages don’t mean diddly.” At first I thought she just meant that past returns aren’t a good predictor of future returns. But it turns out that she misunderstands how mutual funds report their returns.

She uses the example of a mutual fund with the following annual returns:


Add these up and divide by 5 and this “averages out to an annual return of 8.4%. That means on a $1000 investment, you should end up with $1,497.” She got this figure by compounding 8.4% for 5 years.

She then goes on to apply the actual 5 returns to a $1000 initial investment and finds the final result is only $1438. Of course, the difference is due to the volatility of returns. Her explanation that the one negative year is to blame is a little off, but it’s close enough. After all, the bulk of the volatility in these 5 returns comes from the one negative return.

The big problem with her complaint is that the mutual fund would not report its 5-year return as 8.4%. It would actually report 7.53%. This is because mutual funds must report compound returns. This means that if you start with $1000 and compound 7.53% for 5 years, you get the $1438 figure that Vaz-Oxlade calculated.

Reversion to the mean

“If a good fund has swallowed an underperforming fund, know that post-merger, hot funds tend to cool off.” The truth is that hot funds tend to cool off whether they’re involved in a merger or not. Instead of chasing star fund managers and trying to guess which funds will be hot, it’s far better to focus on low fees and a sensible asset allocation.

Newbie investors

“If you are relatively new to investing and want to get into the game but just don’t know where to start, if you’re learning, but don’t want that learning to get in the way of investing in equities, the answer is simple: Buy the index.”

This is good advice. But the implication is that once you learn more, you can do better choosing your own stocks. This just isn’t true. Investors who beat the index over the long term are very rare. Even Warren Buffett advises the trustee of the money he bequeaths to his wife to “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”


Canadians mostly get the shaft when it comes to investing because of high mutual fund fees. Those who try to invest on their own often harm their returns even more by chasing performance (buying high and selling low). I believe Vaz-Oxlade genuinely wants to help her readers. It would be nice to see her steer her readers away from high-cost investing traps the same way she steers them away from bad spending habits.


  1. Sound like a pretty terrible book. I'll be sure to avoid it.

    1. @Anonymous: The non-investing parts of this book are actually excellent. If you can't seem to get your finances straight or if you are trying to help someone who needs to shape up, Vaz-Oxlade offers many very useful insights.

  2. Hard to believe anyone could be so ignorant and still get published.

    1. @Anonymous: That's a little harsh. I prefer to think that reasonable people who seek correct answers can learn from each other. If I had been writing this blog a decade or more ago, I would have written many things that I no longer believe today.

  3. It sounds like a little knowledge is dangerous.

  4. Vaz-Oxlade is a bombastic entertainer first and a finanical expert not so much. But don't you dare question her. Check this out She incorrectly claims you can only take $5000 out of an RESP in the first year. Search for "gail says" in the comments to see how she reacts to people questioning her on this. And there it is, more than 4 years later. No admitting she is incorrect or correcting her post.

    1. @Greg: I read through the post you pointed to and the disagreement seems to hinge on a single question. If you take some return of capital (ROC) from an RESP during the first 13 weeks of a new school program, will you forfeit any CESG grants? Two advisors in the comment stream say no, and Gail says yes. I poked around online for quite a while and my best guess is that ROC triggers CESG forfeiture only when the child isn't in school. If that's right, then this isn't Gail's best moment. But I can't say I'm certain. Maybe someone can point me to something definitive on this subject. I keep reading things like "If a refund of contributions is made at a time when a beneficiary does not qualify for an EAP, grants and bonds are clawed back." But I don't know if this applies when you've already taken out $5000 worth of EAPs in the first 13 weeks.

    2. Well, I took out $18,000 in the first semester for daughter #1 and $10,200 for daughter #2 in the first semester, limited to $5000 EAP in both cases, the rest contributions. No claw backs in either case. My understanding is except for the $5000 EAP limit, you can withdraw all of the RESP in the first semester. Note that one of the commenters disagreeing with Vaz-Oxlade is Mike Holman, who had just published a whole book on RESPs.

    3. @Greg: Your experience seems to confirm that ROC is penalty-free even when your child is in the first 13 weeks. Actually, in his comment Mike Holman just said ROC is unlimited; he didn't say that ROC wouldn't be penalized. I just reread Chapter 4 of his book and it says the same thing (ROC unlimited and no mention of penalties).

      In any case, if there were penalties for ROC during the first 13 weeks, someone somewhere other than Gail would have mentioned it. It seems quite clear that Gail got this wrong.

  5. Nice that you call her out on the MER issues. She should stick to giving advice to people that are in distressed situations. Her form of advice is only good for a certain demographic. It's really the only thing she understands. Things like setting up money jars for different bills, and low cost food recipes. She gives me the impression that she puts the focus more on "any mutual fund investing" being better than not investing at all. She does not want to confuse her followers by explaining the effect of MER's.

    She should take a few minutes and try out Preet's MER calculator so she can see for herself and understand the long term effects of fees. Could it be she or others close to her are in the business of selling mutual funds? I haven't read the book but it sounds like the same tired arguments when you have this discussion with most any mutual fund "salesperson".

    It does not help when someone who has an audience as large as she does that trusts her advice, is misdirected like this. I have heard her on AM radio some nights I must disagree with some of her advice. Great for someone who can't budget themselves and is constantly in debt with 5 credit cards with balances on them. But, for individual people already investing that have some money sense, definitely not.

    1. @Paul: To be fair, I think the number of people in distressed situations that form Gail's demographic is quite a bit higher than the number of people who fit the demographic I usually address. But you're right that she doesn't seem to fare well when she ventures outside her wheelhouse.

  6. I have read very little of her articles. She seems to be genuinely interested in enriching the personal finance of her readers. But she is mathematically challenged and peddles common sense wisdom backed by incorrect calculations/facts. Her core audience are people who are not financially literate and can't separate the wheat from the chaff. They literally take her advice and try to act on it. We'll never know how many decided against RESP (based on Greg's link above) or towards expensive mutual funds based on Money Rules

    1. @P=NP?: I've learned a lot from Gail about how to help people who handle money poorly. But her advice related to investing makes me wonder how well she handles her own investments.

  7. Good detailed review, avoids slight temptation of buying the book.

    Re MER, As a default position for selecting funds, the lower the MER the better. That means buying cap-weight passive broad-market index funds. You won't go disastrously wrong. However, I think one needs to be able to, and may be able to,specifically quantify a justification for higher MER above the lowest available for an asset class and if one can do it, jump in. e.g. I think paying an extra 0.3 - 0.4% for low vol and fundamental weight (call it value and small cap tilt in disguise if you like, I don't care) Cdn equity ETFs ZLB and PXC respectively is worth it. I own them instead of XIC or any cap-weight ETF since both excess returns (+1.5%) and reward to risk measures show them to be superior in the long term.

    1. @CanadianInvestor: Only time will tell whether more expensive approaches to indexing produce enough higher returns to justify their costs. I've chosen to stick with cap-weighted indexes and rock-bottom MERs.