Why do Canadians put so much of their retirement savings in mutual funds?

David Pett has just written a great article in the Financial Post questioning the value of holding mutual funds in your RRSP. I find Mr Pett totally on-point, largely because his comments  exactly correlate to my own blog post of Oct 2012 listing the  Top Ten reasons not to have Canadian Mutual Funds in your RRSP

Largely the issues remain:

• High management fees (MER)
• Poor management performance
• Weak stock market (since 2008)
• Lack of investment alternatives (poor bond and GIC performance)

Canadians deserve better. After taking a 700 hundred billion dollar haircut in 2008, their ever-nearing retirement lifestyles are in jeopardy due to a lethargic mutual fund management industry.

From the Financial Post:  Mutual funds still popular with Canadians, but why?

Top Ten reasons not to have Canadian Mutual Funds in your RRSP

1. Fox's Paradox:
   
   • I want my fund manager to make enormous profits trading in the stock markets
   • Any fund manager that actually can make enormous profits trading in the stock markets would spend her days making herself rich
   • Therefore no fund manager who can make enormous profits would work at a mutual fund
2. There are no Index Funds that can match the Index
3. The funds do not hold what they say they do. My Global Commodities market is invested 40.7% in Canadian Stocks and 39.1% in US Stocks. That's 79.8% in North American stocks. That's not Global
4. On Jan 3rd of every year your fund loses 4.5% of its value – the cumulative drag of the MER (Management Expense Ratio) and the previous 12 months of inflation
5. Holding US funds in your Canadian investment account incurs currency exchange fees:
   • When you buy the funds
   • When the fund pays dividends
   • When you sell the funds
   • You even pay exchange fees when you receive your annual distribution
6. Holding a mutual fund in an RSP means that you cannot claim a loss on your taxes
7. The highest performing mutual funds charge "loads". A front-end load is a fee to buy the fund; a back-end load is the fee to sell a fund
8. The CDIC (Canada Deposit Insurance Corporation) does not cover mutual funds
9. By definition mutual fund managers churn their holdings – they buy and sell every day, typically turning over 90% of the fund portfolio in a year. If a stock isn't worth buying and holding for 5 years, it's not worth buying and holding for three months'
10. I'll leave the last words to Rob Carrick of Report on Business "Plenty of mutual funds are run by faceless nobodies who come and go with all the impact of a tree falling in a forest."
    
    ROB, Mar 17 2009

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Disclaimer: This is not investment advice. This is the story of how I pick my stocks. I cannot recommend these stocks for you. My invitation is that you use this story as an inspiration to develop your own portfolio that meets your risk profile, the type of stocks you can understand, and that are recommended by professional writers and market analysts. I am an amateur investor. I enjoy the hobby, and invite you to enjoy it too.

My baby takes the morning train

After the slump of 2008 I was fed up with my mutual funds. They were supposed to be a tax sheltered way to grow my savings. They were supposed to be indexed to the stock market. They were supposed to provide for my in my old age. But the answers were "No" "No" and "No". Not only were my fund managers squandering my capital every year – they were charging me from 1.75 to 3 percent of my assets to waste my money.

Then I noticed the fund compositions were so far off base as to be nearly fraudulent. I bought a global precious metals fund. "Global precious metals" meant all Canadian Mining funds. I bought a Global Commodities Fund. "Global Commodities" meant all Canadian Oil, Gas and Mining Companies

By 2011 it was clear that I would have invested more wisely if I'd stuck all my money in the g-string of an exotic dancer named Bambie. Bambie outperformed the stock market. Bambie gave me short-term growth. Over and over again. And Bambie was aging me so quickly that I was never going to outlive my RRSP.

Plus with Bambie I had no problems with timing the market. With Bambie, it was always the right time to get in. And she always told me when it was time to get out!

So in late 2010 I began to formulate a plan. I had accumulated enough in my retirement account that I was going to open a self-directed RRSP. Farewell MERs! Hello per-trade commissions. Farewell Index funds that don't perform the Index. Hello, Bre-X.

In other words this Fox was going to let the herd of Canadian investing sheep follow their advisers over the cliff. This Fox was about to become a wolf. In the coming months I will explain market fundamentals as I understand them. Several principles will come to the fore. I can explain to you how you develop an investing style that lets you pick stocks that you already know how to make money on. It's very probable you can take your own money, and make money with it, than the average mutual fund manager. Let me give you a simple example...

I'm into Canadian Pacific Railways.
First of all – I like trains. I travel by train. I live near the major GO transit line into Toronto. My office looks out onto the Canadian Pacific mainline that travels from Atlantic to Pacific in this great country.

I read about trains every few days. Mostly hobbyist stuff. Old pictures of steam engines, or the electric railway systems of the 1930s. Well guess what? The railway business model hasn't changed since 1840. In other words, my hobbyist interest has given me a fundamental understand of the practical base of the economic model of railroading.

Let's look at those fundamentals:

• A class of ship called "salties" send coal and iron ore to Asia to be made into consumer goods
• Container ships send the finished goods back to North America
• The containers are offloaded onto specialty railcars
• The containers are taken off the railcars and put onto truck trailers at inter-model yards
• The trucks drive the trailers to the discount retailers such as Walmart

How can this market be disrupted?

• Rising fuel costs have increased the cost of sending coal and steel and finished goods by ship so much that ships now practice slow steaming. It now takes a ship twice as long for each leg of the journey
• What this means is that new pressures will force Chinese companies to re-offshore (also called "onshoring") their factories back to North America.
• This is bad for shipping but it means good manufacturing jobs coming back. And it means everything still travels by train.

Looking at the matter from a completely different perspective, the barrier to entry is almost impossible to override. Currently there are seven "Class 1" carriers - Canadian Pacific and Canadian National, CSX Transportation, Norfolk Southern Corporation, Union Pacific, BNSF Railway, and Kansas City Southern.
The CP railway enterprise owns 14,000 miles of usable track. If you want to compete with CP you have to buy 14,000 miles of land, and lay 14,000 miles of track.

Then comes the sweetest plum of all. Canadian Pacific has been under-performing for a quarter-century. Activist shareholders have succeeded in forcing the CP Board to appoint ex-CN Chair E. Hunter Harrison as the new chair of Canadian Pacific.

And this concludes our lesson. This makes CP a "story stock". They used to be in the toilet. Now they hired the greatest mind in railroading. That makes for a good story.

I look forward to sharing with you the story of how this stock play unfolds.


Canadian Pacific Railways
Ticker – CP

Wall Street is bullish on Railway Stocks

• Genesee & Wyoming
• CSX

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Disclaimer: This is not investment advice. This is the story of how I pick my stocks. I cannot recommend these stocks for you. My invitation is that you use this story as an inspiration to develop your own portfolio that meets your risk profile, the type of stocks you can understand, and that are recommended by professional writers and market analysts. I am an amateur investor. I enjoy the hobby, and invite you to enjoy it too.

Top 10 impacts of a Presidential Election on mutual funds

I am fine-tuning my RRSP mutual fund portfolio. That means I am moving to a self-directed LIRA at a discount brokerage. Noticing, as I did, that I was doing this on the cusp of a Presidential Election, I thought my readers would appreciate it to know how this impacts market valuation. Behold - Let's look at the Top Ten impacts of a Presidential election on the stock market...

Media Handout

1. Even if investors see a rosy pattern shaping up, the question nags: Is it likely to hold up this year? After all, 2008 was a presidential election year, yet the S&P lost a heart-sinking 33.5 percent over the last seven months. Investors learned the election-year rule of thumb has exceptions, and painfully sore ones at that.
   
2. On average, the third year of a presidency is by far the best year for stocks. That's not to say it's always the best year. "However, as can be remembered vividly, this approach did not work at all in 2008," warns Citi's Tobias Levkovich. (Source: Citigroup)
   
3. Volatility spikes in the 2nd year, then levels off . According to Goldman Sachs' Jose Ursua: "Volatility often sees a first post-election blip (as markets digest changes) and then a gradual increase towards the second year of the cycle."(Source: Goldman Sachs)
   
4. Equity returns, worldwide, are better explained when considering US election-related variables U.S. election cycles explain more than just U.S. equity returns. From Goldman Sachs' Jose Ursua: "In particular, the election cycle in the US helps to explain a sizable fraction of non-US equity returns, both in other developed markets and in emerging markets." (Source: Goldman Sachs)
   
5. Since 1900, only 5 presidents have seen stocks rise more than 50% during their term. The exclusive club includes Calvin Coolidge, FDR, Dwight Eisenhower, Bill Clinton, and Barack Obama. (Source: Bespoke Investment Group)
   
6. When stocks rise significantly during a presidential term, the incumbent usually wins re-election in a landslide. From Robert Prechter: "We deem an election a landslide victory if the incumbent competed for and won re-election by defeating the nearest competitor with an electoral vote margin of 40% or greater...We define a large positive stock market change as a net gain of 20% or more in the preceding three-year period...We conclude that a large net positive stock market change during the three years prior to the election is highly likely to be associated with a landslide victory for the incumbent as opposed to a landslide loss." (Source: Robert Prechter)
   
7. You can figure out who will be president based on the 3-month stock market performance preceding an election. From S&P Capital IQ's Sam Stovall: "An S&P 500 price rise from July 31 through October 31 traditionally has predicted the reelection of the incumbent person or party, while a price decline during this period has pointed to a replacement. Since 1948, this election-prognostication technique did an excellent job, in our view, recording an 88% accuracy rate in predicting the re-election of the party in power (it failed in 1968). What's more, it recorded an 86% accuracy rate of identifying when the party in power would be replaced (it failed in 1956)." (Source: Stovall's Sector Watch)
   
8. Lately, President Obama's approval rating has been tightly correlated with stocks
   
9. Let's bust one myth: namely, that Republican presidents are better for stocks. It is not true. In election cycles since World War II, the Dow Jones industrials have posted bigger average returns under Democratic presidents. (Source: Stock Trader's Almanac)
   
10. How have stocks fared from Election Day to year's end? When a Democrat wins, stocks have lost 1%, while rising 4% if a Republican wins. Source( Bespoke Investment Group)

Sources

Business Insider
ABC News
Christian Science Monitor