David Trahair came out with a second edition of his book, Enough Bull, that makes the case for avoiding stocks by investing solely in Guaranteed Investment Certificates (GICs). Unfortunately, just about all of the criticisms I had in reviewing the first edition still apply.
I won’t bother to repeat most of the points from my earlier review. The details Trahair gives about his own investing history show a person who invested more than half of his money in Labour Sponsored Investment Funds (LSIFs) and got burned. He has now retreated into the safety of GICs and recommends you do the same.
The biggest problem with his argument is that he continues to ignore stock dividends. This isn’t just nitpicking. Over 28 years, reinvesting a 2.5% dividend will double your savings. This makes a real difference to how soon you can retire and how much you can spend in retirement.
Trahair looks at the S&P/TSX Composite index in the 25 years starting on 1989 July 31 and finds the price increase (i.e., ignoring dividends) is 5.6% per year. He uses this to justify an assumption that stocks will average only a 5% return per year in the future. “Take off fees and you’ll only get 3%.”
The sad thing is that it is possible to make a reasonable case for GICs, at least for some investors. People pay high mutual fund fees, as Trahair points out. Another point that would bolster his argument is that people tend to underperform their own mutual funds because they tend to jump in and out at bad times. So, for some investors, GICs don’t look too bad. But any reasonable analysis has to include dividends.
As for me, I’ll happily accept the volatility of stocks. My portfolio of the world’s stock indexes costs me less than 0.2% per year, including fund MERs, other fund expenses, trading commissions, bid-ask spreads, and foreign withholding taxes on dividends. The gap between my average return and GIC interest rates has been substantial. Your mileage may vary.