long term investment question

[joshmxpx]

My wife and I want to start putting a little away for when we retire or have kids in college or things like that. We decided we want to put $20 a week away into a long term account (25-40 years). What would be the best place to put this money, where can we get the most interest, do we need a high principle for a lot of accounts?

Any suggestions would be appreciated

[sumfunny]

20 bucks a week is petty just around 1040 a year, might as well just put it into ING or similar until you have enough for a gic or T-bill or similar, if its for college I'm not sure but you may be able to open an RESP even if the kid isnt in the oven yet, canadian scholarship trust might be good place.

[15-20_God]

$20/week isn't much but its a start especially if you're looking at retirement and funding your childrens education. Interest isn't really a factor at this point as after a year you will accumulate about $1,200, so there is no real difference in finding something with the best interest as the dollar difference between 0.25% and 2.50% is small.

With that being said your best options are:
1) make the contribution into your or your wife's RSP, whoever is the higher income earner. Doing this will allow for tax deferred growth inside the RSP and a nice little deduction come tax time.

2) if you want to fund your childs education make the contribution in an RESP. The government will contribute 20% of what you contribute (ie. if you make a $1200 contribution annually the govt will kick in $240) Your contribution into the RESP is NOT tax deductible however any growth and income grows tax deferred inside the account until it is withdrawn.

Most mutual funds allow you to open accts and make periodic contributions into an RSP/RESP. Given your time horizon I wouldn't suggest an interest paying acct as that would get you nowhere after inflation. Research some mutual funds and purchase some grwoth funds with the money you're putting aside.

edit - disregard my math, I just woke up......but my points still stand

[advantage21]

Your time horizon is long enough that you should consider putting your money into a low management fee Index fund. TD's eFunds (http://www.tdefunds.com/index.html) is a good choice. The min initial investment is $100 for an RSP account and subsequent automatic contribution is $25, so you can setup a bi-weekly schedule.

[Hymac]

Kind of what's been echoed above, but with your time horizon, you're in the best position to invest in riskier assets (ie stocks). In the long term, the return on investment will be much greater than a GIC or ING Savings account.

[almostfreeman]

If you don't want to be involved in trading individual stocks, a growth mutual fund would probably generate the highest return for you. Yes $20 isn't alot , but you have to start somewhere. I think most funds allow $25 as a minimum monthly deposit though. Might also consider telling the grandparents and other relatives that usually buy frivlous gifts at christmas , birthdays etc, to consider adding more units to the savings fund rather than the newest kid's fad.

[superdsi]

Efunds have already been mentioned but they are a very good way to invest.
Cheap MER (mangement expense ratio-the money TD takes for its part)
is very reasonable and they will match actvely run funds overtime.
A TD investment counsellor or any investment rep. will never recommend these funds because they get very little renumeration in return. Actively managed funds give more money to the investment counsellors so that is why they push them. In a few years buy some exchange traded funds (index funds traded on the stock exchange) from www.iunits.com and equally buy the TSX, S&P 500, and International funds and you will be all set.

[15-20_God]

The recommendation has little to do with renumeration. The reason why index funds aren't widely recommended is because they are designed to track the performance of a specific index, ie S&P 500, TIPS. Anyone idiot can buy an index.

Conversly, the mandate of a portfolio manager is to outperform the index, thus justifying higher fees for an actively manage portfolio, diversification, and professional management.

[astrolad]

My wife and I want to start putting a little away for when we retire or have kids in college or things like that.

I have used a RESP. I have more than one child so it has more than a single name on it. The advantage is that if one kid's education costs more than the other (think chef school vs. university), there can be some flexibility there.

What if a child doesn't go on to any education/wants to bum around in Europe for a awhile, and the RESP needs to be collapsed?

Well, if the child is at least registered up for an education of some sort and a budget is submitted, the money can be drawn out of the RESP.

[bdckr]

The recommendation has little to do with renumeration. The reason why index funds aren't widely recommended is because they are designed to track the performance of a specific index, ie S&P 500, TIPS. Anyone idiot can buy an index.

Sure, any idiot can buy the index. But you forgot to say that the idiot who buys the index will probably do better than the idiot who invests in an actively managed mutual fund.

The truth is that a majority of mutual funds fail to outperform the S&P 500. The exact stats vary depending on the year, but on average, anywhere from 50%-80% of funds get beat by the market. The main reason for this is the costs that mutual funds charge. A fund's return is the total return of the portfolio minus the fees an investor pays for management and fund expenses. If a fund charges 2%, then you have to outperform the market by that amount just to be even. (http://www.investopedia.com/university/indexes/index8.asp)
In an April 2004 speech, Bogle noted that in 1970 there were 355 mutual funds. Of these, more than 60% no longer exist. Of the remainder, 43 managed to beat the S&P 500's average annual return of 11.3%, only 23 of them clearly above a statistical threshold. That's an outperformance percentage of between 6.5% and 12.1% of all funds over the long term. Let's not quibble with the percentages and instead settle on this fact: Outperforming the passive index is hard due to the drag on net returns caused by expenses, loads, and taxes (http://www.fool.com/news/commentary/2004/commentary04072802.htm).
So why do advisers recommend funds that are likely to do worse than index funds?

Remuneration seems a likely culprit when we're talking about advisers that make money from commissions.

Until we can get in the head of an investment adviser, we can't know the real answer, but I agree with superdsi that it's probably the trailer fee and whatever other commission they get from the mutual fund (http://www.asldirect.com/ASLDirect/ASLD.nsf/pages/TruthAboutFees?OpenDocument). The bigger the MER, the bigger the fees they can pay out to advisers. Can you think of another good reason to recommend an inferior product?

Conversly, the mandate of a portfolio manager is to outperform the index, thus justifying higher fees for an actively manage portfolio, diversification, and professional management.So let's look at all the reasons you think they deserve higher fees:

Sure they're supposed to outperform the index. But most of them don't.

Active management is just a way of saying they're not an index fund.

Diversification can be achieved by buying different index funds.

Professional management is only useful if you're getting more out of it than you're paying. And most of the time you don't.

So how does any of this "justify higher fees"?

[ilfsoy]

Another vote for TD efunds (can setup an RESP if that's your objective). Cash is not a longterm investment.

[15-20_God]

Sure, any idiot can buy the index. But you forgot to say that the idiot who buys the index will probably do better than the idiot who invests in an actively managed mutual fund.



So why do advisers recommend funds that are likely to do worse than index funds?

Remuneration seems a likely culprit when we're talking about advisers that make money from commissions.

Until we can get in the head of an investment adviser, we can't know the real answer, but I agree with superdsi that it's probably the trailer fee and whatever other commission they get from the mutual fund (http://www.asldirect.com/ASLDirect/ASLD.nsf/pages/TruthAboutFees?OpenDocument). The bigger the MER, the bigger the fees they can pay out to advisers. Can you think of another good reason to recommend an inferior product?

So let's look at all the reasons you think they deserve higher fees:

Sure they're supposed to outperform the index. But most of them don't.

Active management is just a way of saying they're not an index fund.

Diversification can be achieved by buying different index funds.

Professional management is only useful if you're getting more out of it than you're paying. And most of the time you don't.

So how does any of this "justify higher fees"?

I don't know where he gets those figures from and what type of funds he's comparing it to. Its would be unfair to compare the mutual fund universe to the s&p500 as the s&p is a broad measure. Fixed income funds and money market funds would undoubtly underperform the index. You have to compare apples to apples.

Mutual funds are NOT an inferior product, however there are many inferior funds out there. An investor has to do their research and decide what is right for them. I can point out just as many funds that outperform the market as just as you can point out as many that outperform. Just like anything, there will be winners and there will be the dogs.

Advisors don't recommend funds based on compensation, believe it or not they are truly looking out for the best interest of client, otherwise they won't be around for long.

Here are a few funds to look at, notice that the investor is earning a higher rate of return while taking on less risk. Returns shown are net of fees.

http://globefunddb.theglobeandmail.com/gishome/plsql/gis.fund_pro?fundname=CI+Harbour&iaction=Get+Fund+Profile

http://globefunddb.theglobeandmail.com/gishome/plsql/gis.fund_pro?fundname=Fidelity+Canadian+Asset+Allo c.-A&iaction=Get+Fund+Profile

[e0gdi]

bdckr is right on. Historically no managed fund has been able to consistently beat index funds. If you're thinking long term, nothing will outperform index funds. Anyone who knows anything about this stuff will suggest the same.

[15-20_God]

bdckr is right on. Historically no managed fund has been able to consistently beat index funds. If you're thinking long term, nothing will outperform index funds. Anyone who knows anything about this stuff will suggest the same.

is this sarcasm or is this what you really think?

[e0gdi]

is this sarcasm or is this what you really think?

?? there was no sarcasm there at all! If you think thats wrong then point me to a fund that has consistently outperformed index funds. And I'm not talking like one or two or even 5 year periods, in this case I'm assuming he's looking at 20-30 years.

[bdckr]

Some more comments about active management and indices:
If the markets are so efficient, why have some funds outperformed the S&P 500 over long periods of time?

Some mutual funds have indeed outperformed indexes over long periods of time, but the number of outperforming funds is no different than what we would expect from random chance. This does not prove that mutual fund performance is random, but it does mean that we cannot disprove that relative performance is based on luck. More importantly, the seemingly random pattern to mutual fund returns indicates that there is no consistent means of selecting mutual funds which will outperform in the future.

The idea that investment returns might be simply a product of chance might ruffle a lot of feathers in the investment business, but is an idea supported by extensive academic research. Many studies have shown that over long periods of time, most equity investment managers underperform relevant indices by about as much as they charge in fees and incur n trading costs.

(http://www.indexfunds.com/articles/20010406_cavcap_iss_act_CCM.htm)

And mutual fund managers often under-perform their target index due to advisory fees, transaction costs and operating expenses. According to the Vanguard Group, broad stock market indexes have outperformed the average general equity fund over time. (http://www.moneysense.ca/investing/mutual_funds/article.jsp?content=102765)

When "mutual fund experts" are asked to pick mutual funds that they think will beat the market, they almost always fail, typically with disastrous results. In 1998, ten mutual fund experts were asked by USA Today to pick two mutual funds for the year. None, none, were able to pick a fund that beat the market. Studies show that picking mutual funds on the basis of past performance does not work, and saints preserve anyone who picks mutual funds on the basis of screaming magazine headlines. (http://www.fool.com/school/mutualfunds/basics/choosing.htm)

[ilfsoy]

Yep, bdckr is right, several studies show this. However, there is a significant difference in the terms "most" and "nothing", saying zero managed funds outperform is false.

[bdckr]

Yep, bdckr is right, several studies show this. However, there is a significant difference in the terms "most" and "nothing", saying zero managed funds outperform is false.Completely agree. See all previous posts. I'm always talking about and quoting the likelihood of beating the index. Probability, not absolute.

[astrolad]

I read a good article about the couch potato portfolio from Money Sense.
Bascially, the idea is to use a couple of index funds to easily out do mutual
funds and balance risk over the long term. Mind you, this is only based on
historical analysis.
The source of the investment strategy is Scott Burns, a writer for the DallasNews.
http://www.dallasnews.com/s/dws/bus/scottburns/couchpotato/columns/vitindex.html
(Requires login. Use bugmenot.com (http://bugmenot.com) ).

[e0gdi]

I never said no fund couldn't. Every year there are probably lots of funds that outperform the index. But the point is that it is never the SAME fund doing it for like 20 years. If you look at the big picture, I don't believe there is ONE fund that has outperformed the index for a long time.(20+ years)

[joshmxpx]

a lot of you have stressed resp, but that's not really our objective. this would just be some money that we can save up for a long time, then use for something worthwhile, not necessarily education, as our kids will hopefully pay their own way. i had an resp growing up, and i know its a huge pain in the ass, especially when it comes time to withdraw the funds.

i'd rather have something that we can leave in for at least 25 years, after that we can pull it out anytime we deem necessary, whether we wait for retirement, or use it right away.

sounds like a lot of you recommend td efunds, so i might look into that for now.

thanks, and if you have any more suggestions, feel free to shout them out.

[advantage21]

In a perfect world, financial advisors will never steer you into an investment that is wrong for you. But in reality they have to make money too and only the naive will believe they will never push a mutual that will give them a better commission or churn a client's account. But I'm digressing....

There is enough research done to show that passive index funds consistently beats actively managed funds in the long run (20 years). I'll give the last word on this subject to Warren E. Buffett:

"By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when "dumb" money acknowledges its limitations, it ceases to be dumb."

[advantage21]

thanks, and if you have any more suggestions, feel free to shout them out.

I highly recommend you to read Stocks for the Long Run by Jeremy Seigel. You can pick up copies for less than $20 in eBay.

[ilfsoy]

I never said no fund couldn't. Every year there are probably lots of funds that outperform the index. But the point is that it is never the SAME fund doing it for like 20 years. If you look at the big picture, I don't believe there is ONE fund that has outperformed the index for a long time.(20+ years)

There are a few funds out there that have, not very many have 20+ year track records though, 10-15 yr is more common. Looking at compounded returns since no particular investment or investment style will be in favour every year. One exception, widely publicized in the US business world, is Legg Mason Value Trust which has beaten the S&P 500 for fourteen straight years.

[Rehan]

One exception, widely publicized in the US business world, is Legg Mason Value Trust which has beaten the S&P 500 for fourteen straight years.Thoughts on Indexing from that fund's manager:
http://www.bylo.org/leggmasn.html

[scottyb]

Another vote for index funds!

[Powderworker]

w00t! Another vote for index funds/eFunds....

Best way to invest regularly and dollar cost average with very low MERs, and no buying comissions.

Just do this: 25% CDN bond, 25% SP500, 25% Intl Index, 25% Canadian Index (TSX/SP).... sit back, invest monthly, and don't monitor things too closely. If the market takes a dive... use that as a buying chance.