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I Should Have Bought An Index Fund

Tom Drake — Mon, 27 Sep 2010 09:00:23 +0000

An index fund is a mutual fund that tracks a certain index. Large market indexes include the S&P TSX, Dow Jones and S&P 500. Index funds based on these indexes are a great way to invest in the stock market without buying individual stocks or actively managed mutual funds. Unfortunately, I didn’t always know about index funds. My first time investing, I went into the bank to open an RRSP account and I chose an actively managed dividend fund with a good 5 year history.

Though I hadn’t invested before, I thought I knew what I was doing. I read a bit online, found a mutual fund with a good track record and a MER below 2%. I knew dividends can greatly help your long term returns so I figured dividend funds would be a good choice. So why do I regret the investment?

Past History Does Not Indicate Future Performance

While it’s great that a mutual fund had a solid five years of returns, it doesn’t mean that the next year will do just as well. In fact, there are studies that indicate it’s all the more likely that the fund will have a bad year. Not only do all investments have their ups and downs, but there are other factors such as a major change in the portfolio of the mutual fund or even a new fund manager behind the scenes.

Management Expense Ratio

A Management Expense Ratio (MER) of around 1.7% isn’t necessarily considered high when there are other funds at 2.5%. However, considering I now don’t invest in any mutual funds with MERs over 0.5%, this means I was losing at least 1% of my return in my previous mutual fund.

Mutual Fund Not Sticking To It’s Purpose

When trying to set up a balanced portfolio, you might pick certain funds to fill a missing piece, whether it’s a certain industry, country, or type of investment. So if you’re looking for a Canadian dividend fund, you need to be aware that you’re not only getting Canadian dividend paying stocks in that fund, but anything else a fund manager may decide to add in an attempt to increase the return.

How I Started Investing In Index Funds

I was lucky enough to cash out my mutual fund through the Home Buyers Plan near its peak price, and before the crash in 2008. Then I decided to setup a TD e-Series Funds account, buying the TD U.S. Index and TD International Index. In a few years I plan to add the TD Canadian Bond Index to reduce the risk of an all-stock portfolio.

Monevator and Green Panda Treehouse also wrote about their first time investing. What’s your story of your first time investing?

I Should Have Bought An Index Fund originally appeared on Canadian Finance Blog on September 27, 2010.

How To Setup and Rebalance TD e-Series Funds

Tom Drake — Thu, 26 Mar 2009 10:00:23 +0000

There is a bit of effort you need to put in to invest in TD e-Series Funds, but it is worth it. First of all, you need to apply using the pdf available on the TD Canada Trust website.

The Account Application is pretty straightforward. You’ll need to provide information like your name, SIN, date of birth, and banking information.

The next couple pages are the Wealth Allocation Model and then the Investor Profile. Fill out the Wealth Allocation Model to provide your Total Point Score. This score will show you which asset mix would be right for you. TD will review this and want the asset allocation to match your score. Because of this, if you are quite sure of what allocation you want, you may want to adjust your score to match that.

The Portfolio Worksheet is where you enter the exact asset mix you want and the amount you are investing, both as a lump sum and pre-authorized purchase plan. To keep it really simple, many investors with a long enough investment time frame might benefit from a equal split into:

Fixed Income 25% – TD Canadian Bond Index
Canadian Equity 25% – TD Canadian Index
U.S. Equity 25% – TD U.S. Index
International Equity 25% – TD International Index

Next is a simple Understanding & Consent form to sign. In the Transaction Form you have to re-enter the information from the Portfolio Worksheet. These two asset mixes do need to match.

Then mail it in to TD e-Series Funds Administration. The full address is on the first page of the pdf. Once everything is setup, TD will mail you your login information.

Once a year, you should rebalance your portfolio back to your original asset mix. Using my example above, if you have a certain amount available to invest, put it into the under performing funds to bring them back up to 25%. If you do not have enough new money to re-balance, you can sell some of the better performing funds and put it back into the others. By rebalancing, it forces you to buy low and sell high.

These steps will provide a diversified portfolio, investing in the entire index that the funds track. You can rebalance it yourself and you will be paying a Management Expense Ratio (MER) of less than 0.5%.

How To Setup and Rebalance TD e-Series Funds originally appeared on Canadian Finance Blog on March 26, 2009.

TD e-Series Funds

Tom Drake — Wed, 25 Mar 2009 10:00:17 +0000

TD e-Series Funds may be the simplest way for someone to invest in a diversified portfolio with low Management Expense Ratios (MERs). Below are the four funds that you can use to build a rather complete portfolio and would work well for regular contributions into an RRSP or RESP.

TD Canadian Bond Index tracks the performance of the DEX Universe Bond Index. The Universe Index is comprised of Canadian investment-grade bonds which mature in more than one year. It has a MER of 0.48%.

TD Canadian Index tracks the performance of the S&P/TSX Composite Total Return Index. The S&P/TSX Composite Index is comprised of Canadian issuers traded on the Toronto Stock Exchange. It has a MER of 0.31%.

TD U.S. Index tracks the performance of The Standard & Poor’s 500 Total Return Index. The S&P 500 Index is comprised of 500 widely-held U.S. issuers. It has a MER of 0.33%.

TD International Index tracks the Morgan Stanley Capital International Europe, Australasia and Far East Index. The MSCI EAFE Index is a broadly diversified index consisting of equity securities of companies domiciled in developed markets outside the U.S. and Canada. It has a MER of 0.44%.

Not only do these four funds invest you in the entire index, their MERs are about 2% lower than the average mutual fund. This 2% advantage can go along way when investing over a long term.

Tomorrow’s post will detail some of the advantages that the TD e-Series Funds have over other mutual funds and show you how to open this type of account.

TD e-Series Funds originally appeared on Canadian Finance Blog on March 25, 2009.

Money Sense

Tom Drake — Tue, 03 Feb 2009 18:00:13 +0000

Money Sense has been a very inspirational magazine to me. Whenever I find the latest magazine in my mailbox I stop whatever I’m currently reading to read it from cover to cover. Their articles cover everything related to money, including leveraged investing, financial makeovers, real estate and rating stocks. They also have interesting articles on buying cars, surviving the current recession and rating the best places in Canada to live. One of the most eyeopening articles has been their Couch Potato strategy.

When I first read about the Couch Potato strategy I realized how simple investing can and should be. The basic premise is that by investing in ETFs or TD’s eFunds you can build a portfolio that equals the various indexes, 20% in Canadian equities, 20% in US equities, 20% in international equities and 40% in Canadian bonds. All with management expense ratios (MER) under 0.5%. While you won’t do any better than the market, you also won’t do any worse, just average. This is better than it sounds since, as a whole, the market is the average, but in regular mutual funds you’re getting the average minus expenses that equal more than 2%.

I highly recommend that you have a look at Money Sense magazine.

Money Sense originally appeared on Canadian Finance Blog on February 3, 2009.