The current investment climate is about as bad as it gets when you look back over an extended time period. Canadian investors have watched as equities vary between days of terror (huge market drops) and days of despair (slow death via multiple days of small declines). The odd good day or week in the markets seems to just tease us for what might have been had we invested in the 90’s instead of this century! Even the old standby, the Money Market Fund, has proven to be neither safe nor profitable. We lamented the lost decade for equities from 2000 to 2010, and then started the new decade with negative equity markets for 2011.

So what can we do and what should we do!

1-      We CAN stop adding to the problems by making poor decisions about our investment strategy. The typical investor in a MF or ETF Index fund will make significantly less than the fund itself over the course of a typical year. That is because investors jump in and out of the equities market based upon the current emotions they are feeling. Studies show that this undisciplined approach will cost investors up to 4% less return than a mutual fund would make on average. Professionals do NOT jump in and out of the markets based upon emotions. They follow an Investment policy Statement (IPS) that outlines the minimum and maximum percentages of equity that MUST be held in the portfolio. For those that wondered about the definition of “re-balancing” a portfolio; that is the term used for bringing a portfolio in line with its IPS guidelines. Without an IPS you CANNOT re-balance your portfolio!

2-      We CAN stop pretending that the folks who make a good living managing investments have an ability to predict what stocks will go up or down next week or next year. Professionals can help you select stocks which have good balance sheets and good management in place. They can also help you ensure your portfolio is well diversified. Other than that, professional stock traders are of little use unless they can provide insider information (which in general is illegal). In 2011 the consensus forecast of investment managers in Canada was for stocks to outperform bonds and commodities. It will come as no shock that a) they were wrong, and b) they have made the same forecast for 2012. In fairness…..they eventually will be correct just based on the law of averages!

3-      We CAN reduce the fees we pay. With investor returns at historic lows we cannot continue to give a guaranteed 2-2.5% return to investment salespeople. If markets were to provide you with the 4%-5% returns we expect in the near future, a fee of 2.25% would be 45-55% of your total investment return. In years where markets drop, like 2011, the fee just increases your losses. If you negotiated a fee of 1.25% you would be giving up only 25% of the same return forecast! If you used ETF Index funds you could reduce the fee drain to a fee of .25% and have only a 6% fee drain.

While markets are certainly tough it does not mean we cannot do better. A little effort, some simple strategies and a calm demeanour can go a long way to lessening the pain of being an investor today!

If you need an IPS then ask an independent (non-selling) firm to customize one for you!



Well, it was another year of frustration for “real investors”. By “real investor” I mean those of us who trade without access to inside information and who cannot augment our returns through hidden fees or commissions. While we will lick our wounds and carry on, we should also track where the smart “professionals” were focused in 2011 to see where we missed the boat.

Consensus Forecasting for 2011: The “professionals” forecast the market performances every year and then a “consensus report” is tabulated to allow us to peak under the curtain and see what active traders are doing to beat the markets. The asset class forecasts were very clear that security performance in 2011 would see returns ranked as follows:

–          Equity stocks would be the best performing asset class

–          Commodities would be the second best performing class of assets, and

–          Bonds would trail the above classes and provide weak performance

Based upon the forecast, you would overweight equities, diversify with commodities, and minimize your bond holdings.

Let’s see how well the smart money did in forecasting 2011.

–          Equity returns in Canada ( TSX broad market total return index) -8.71% and if you choose to look just at the blue chip TSX 60 returns were -9.08%

–          Commodities as measured by the Auspice Broad Commodity Index was 1.78% to the positive side

–          Bonds as measured by the Dex Bond Universe was up 9.7%

Wow, the smartest guys on the street managed to show an amazing dyslexia of returns! They used thousands of analysts to crank out the research math and got everything backwards! In fairness however, the forecasts were great for revenues at the brokerage firms as investors traded heavily into the markets based upon the forecasts. By the end of the investment rich RRSP seasons investors had bid up the equity markets and the research looked great. However, once all the suckers….um, investors were fully invested, the professionals did a quick sprint to the exits, leaving the retail investors holding a smelly mess of equities. The TSX dropped from the lofty mid 12,000’s to the more realistic low 11,000’s. Unfortunately, those who followed the advice in late February and early March can only wish they had lost 8 or 9%! In fact many will see 15-20% drops with their RRSP investment money.

So, how did a conservative indexer do in this type of market? If the pro’s got it wrong we can only assume the indexers got creamed! Our conservative 50/50 balanced model would have received the returns of a typical mix of ETFs somewhat like the following:

Cdn Equity 25% XIU -9.22
US Equity 12.5% XSP 1.07
EAFE 12.5% XIN -12.7
Bond 50% XBB 9.38
Total 100% 0.92%

Well, it was definitely a tough year; however staying diversified reduced the damage significantly. Even if investors reduced the risk by splitting the fixed income between short and long duration bonds (50% XBB and 50% XSB), the overall return would be -0.3% for the year 2011.

Obviously the higher the Canadian equity component or the EAFE equity component, the worse the overall portfolio performance. For those active traders that jumped on the gold bandwagon the entry point was a challenge. On the whole XGD (the gold ETF) was down 14% and the much recommended emerging markets saw a decline of 16.4% as measured by the emerging market index. So, if you followed the professionals you were heavy equities, heavy emerging markets, heavy gold and light weight bonds. If you followed your Investment Policy Strategy as a conservative investor you retained your capital! Thank goodness I am a dull investor with a conservative IPS!


We just wanted to send out a short note to confirm that our blog will once again be active. Our goal remains to initiate discussion and to provide a perspective that reflects our thoughts and concerns with regards to the current investment industry.

Our new blogs will be authored, for the most part, by myself, Mike Macdonald, and will reflect the content released simultaneously on the blog “unbiasedadvisor.blogspot.com” which is written under the name “soismike” ( a throwback to our corporate roots as Second Opinion Investor Services”).  While our posts will be less frequent than we previously published, we hope each posting will help engage our readers in the investment world, financial planning, and our current markets.

mike macdonald

The greatest risk to passive investing is being too active.

Passive investing is an investment strategy in which a portfolio is managed with as few trades as possible to minimize costs and taxes. Index funds are the most popular form of passive investing. Active investing seeks to outperform an index through the strategic buying and selling of securities.

Statistically, there can be little doubt that passive investing beats active investing. This is supported on an ongoing basis by SPIVA as well as numerous other academic studies. In my view, the biggest problem with passive investing is that many investors are emotionally unable to stay the course. In other words, there are certain investors who are not passive enough to be successful with passive investing.

For instance, many passive investors bailed out of equities during the 2008 decline, most right near the bottom. Many were still out of the markets in 2009 during the massive recovery, afraid to get back in. They locked in their losses and missed the rebound. This was not what they were supposed to do according to the passive mantra, but emotionally they could not stick with the plan.

My clients are constantly being swayed by the news and wondering if they should make changes to their portfolio. I spend time talking them out of making moves because of Greece or oil price movements — not to mention interest rates, China and maybe even rumours of the cancellation of 30 Rock.

A study entitled “Investor Timing and Fund Distribution Channels” shows that investors will often underperform the actively-managed mutual funds in which they find themselves. They make bad market timing decisions that have a negative impact on their portfolios. This is disconcerting, since the performance of actively-managed funds is already impaired by the higher fees.

It is easy to state that a simply constructed passive portfolio will outperform an active, higher cost portfolio. Without the help of investment professionals however, certain individual investors will most likely undermine the ideal that is passive investing and be worse off than if they had a good and honest investment counsellor. What kind of investors? My experience suggests both the novice investor and those with too much confidence in themselves will have difficulties with passive investing.