Wednesday, December 16, 2015

ETF Investment Tips I Don’t Follow

I came across an article promising 101 ETF investment tips from 57 ETF experts (but it appears to not be online any more). While debating whether I thought I could slog through such a long article, I decided to focus on just those tips that I don’t follow. If I have a good reason not to follow them, I should be able to explain it. And maybe I’ll find a gem among the tips that changes my mind about the way I invest.

Talking about the tips I do follow is like having a meal with like-minded friends. It’s an enjoyable way to spend time, but that’s not my purpose here. So here are just those tips I don’t follow.

4. Allocate your age as your percentage in fixed income.

I don’t have any bonds at all in my long-term savings. I only use safe fixed income investments for money I’ll need in less than 5 years. I plan to carry this approach into retirement by holding 5 years of my spending in guaranteed investments and holding the rest in stocks. I expect my allocation to fixed income to be less than my age indefinitely, but I don’t recommend this approach to others. Each person’s appetite for risk and employment situation are different.

5. Save at least 10% of pay into a target date fund.

I prefer to save much more than 10% of pay during good times because bad times are inevitable. I’m not interested in target date funds. I see the beginning of retirement as just a phase change in a lifetime of investing rather than as a final destination. I prefer to control my allocation to fixed income myself.

22. Stop comparing your investment returns to your neighbors’ or that of a specific index.

I agree it makes little sense to compare your returns to your neighbours’ returns. After all, most of your neighbours don’t know their investment returns and will likely make up wild overestimates. However, I’m leery of those who say not to compare your returns to an index. It’s true that comparing your returns to the wrong index is a bad idea. For example, don’t compare your portfolio of 5 Canadian balanced funds to the S&P/TSX. But you could compare this portfolio’s returns to a 50/50 blend of a Canadian bond index and the S&P/TSX. Whenever I hear an advisor say not to compare your returns to an index, I suspect the advisor might be trying to hide huge fees.

39. Buy and hold investing is dead and only works in bull markets where inflation is a constant.

I hear this nonsense all the time from those who try to sell their ability to beat the markets on your behalf. Fortunately, the very next tip is that buy-and-hold investing isn’t dead. Subsequent tips call buy-and-hold investing “not great in 2015,” “better than the alternative,” “the worst way to invest, except all the other methods that have been tried so far,” and my favourite “boring and the only proven long term winner.” I guess the compilers of this list didn’t mind including contradictory views.

82. Over a 20-Year Time Horizon, I’m Bullish On The Nasdaq 100 (QQQ).

This is just one of a series of items in the list where advisors talk about areas where they think there will be long-term investment success. I stopped trying to beat the market years ago. I much prefer to just own everything with very low costs and bet on human progress.

I didn’t find a gem that changes my mind about my investment approach, but I still find it useful to read the ideas of those who disagree with me from time to time. Doing this too often can be exhausting, but doing it too little keeps you from learning. After all, I would never have switched to index investing if I had just read about the latest ways to beat the market.


  1. It never hurts to check your internal investing compass every once in a while, and, you did find a few things you didn't agree with. The "no bonds" rule is one I think I need to adopt, that is my Holidays Project.

    1. @Big Cajun Man: If you've determined that avoiding bonds makes sense for your situation, that's fine. But I don't consider it a rule. In fact, most people are probably best off with an allocation to bonds. Without it, they are unlikely to have the stomach for bear markets in stocks.

  2. 22. Stop comparing your investment returns to your neighbors’ or that of a specific index.

    I agree and have trained myself to do just this. Instead I focus on my personal financial goals and the returns required to fulfill them.

    This doesn't mean I completely ignore index performance. I assess historical and forecasted returns (and risks) of indicies before making an investment decision -- an index-linked investment might be better than the alternative -- but stop comparing once the decision has been made. I'll do a second evaluation if/when the investment is sold, but that will be mostly out of curiosity; my prime focus, as stated, is whether or not the investment provided the required risk-adjusted returns.

    Let's face it, there will always be a better place to put your money and there will always be an investment that is outperforming yours, so what good is worrying about it? With continual comparison you are basically chasing returns and that leads to bad behaviour.

    1. @SST: I can understand why an active investor would not get too excited about trailing a relevant index over a few years, but never doing any comparison (even over the long term) is a mistake in my opinion, unless the main goal is to protect one's ego. I'd rather know whether I could be getting better returns in my sleep by investing in indexes.

    2. Again, this leads you to chasing returns as well as assuming future (specific) index returns will be greater than your current investment.

      Perhaps my comment wasn't clear enough. If your investment, whatever it may be, is providing you with your desired/required total risk-adjusted return, then comparing to an index is mere noise.

      Besides that, what timeframe would you use in a comparison? Too short and it's meaningless, too long and...well, too late to do anything about it.

      "Active/passive" is an all together other matter.

    3. @SST: I can see investing strategies where your comments makes sense, but the problem is that I could see an advisor telling his/her client the same thing when the client is invested in closet index mutual funds. In such a case, it makes a lot of sense to compare returns to an index or blend of indexes because there is the opportunity to get exactly the same stocks and bonds for lower fees.

  3. I compare my returns to a model portfolio (same A.A. etc) from my brokerage (RBC Direct Investing) and expect to match them. Funny fact, they dont seem to take into account their huges MER!!!