For my kin: a final word on mutual funds

As you may have gathered from the tone and direction of my comments in the previous posts, I am not a big fan of mutual funds. I believe mutual funds are overpriced and under-performing. That said, some folk need hand-holding and a good mix of mutual funds will do that while putting some money in your pocket.

So, if you insist on investing in one or more mutual funds, watch the following:

• Pay as little MER as possible
• Do BUY no-load funds
• Do NOT buy front-end loaded funds
• Do NOT buy back-end loaded funds
• Do NOT buy a fund based on its name
• Do check a fund's past performance
• Do BUY a mix of funds: Canadian, U.S., International equities plus bonds

Check how the TD Dividend Growth fund has performed compared to the TD U.S. Equity Portfolio fund (TDB3092). Canadian Dividend is green line and U.S. Equity Portfolio is purple.

Having some exposure to U.S. equities is highly recommended, as is some international exposure as well.

An expert on investing, whom I have admired for years, writes a blog called: The Canadian Couch Potato. Click the previous link and read what he has to say about creating a couch potato portfolio using TD e-series mutual funds. To see a suggested portfolio mix click this link: Model Portfolio using TD e-series funds. The Couch Potato portfolio is an excellent guide to creating your own well balanced portfolio. One will not go far wrong just following the advice found on the Couch Potato site verbatim.

Still, I shy away from mutual funds. In my experience ETFs are a better bet than mutual funds. In my next post we will look at ETFs.

For my kin: what have we learned?

What have we learned thus far?

Well, we think we've learned that simply paying more for a mutual fund, in the form of a higher MER, does not guarantee better performance. We've learned that the name of a fund may not reflect how it has performed in the past nor how it will do in the future. Just because it claims to be comfortable guarantee that it will be. We've learned that sometimes owning two funds is better than owning just one.

Now, to throw a monkey wrench into all of it. How a fund has performed is based on the time frame under discussion. Nothing is certain in life and the stock market follows this maxim. All we know for sure is how our five funds performed over the time we've operated our sham portfolios. Let's take a look at a longer time frame. We'll only go back three years as one or two of our funds are quite new.

Over the last three years, the Dividend Growth fund (dark blue line) has outperformed all the others after getting past the hurdle of January 2016 when it dove to the bottom of the pack. That was a stressful time for some of those holding this fund but in the end the fund performed as expected. But, let's admit that stress comes with owning this fund. It gyrates up and down more than any of the others. It's a great ride, and in the end worth it, but many would be unable to hold on through the down times.

The Comfort fund comes in second but it's often bested by the Monthly Income and not because the Monthly Income has been such a stellar performer. No, the Comfort fund was simply not all that comfortable to hold. It was a bit volatile. In the end the Comfort fund and the Monthly Income finished in almost a dead heat.

Whatever happened back in January 2016 allowed the Retirement fund to shine. But note, it did so  only because all the other funds did so poorly. The moment the others gained their footings, they pulled ahead of the Retirement fund and never looked back. Today an investor in the Retirement fund has little more than what they originally invested. Is this the performance retirees want from an investment? If this is what makes them happy, maybe they should simply buy a  GICs.

Before ending this post, let's take a quick look at one other time frame: one year.

In this scenario, the Retirement fund is in first place. What I think is important to note is that it is in the red. Yes, the retiree investor would have been better off with a GIC. Heck, in the past year, they'd have done better putting their money under their mattress.

The Dividend fund is at the bottom. Hmmm. Every year I put money aside for my granddaughters' education. I usually stick it in the TD Monthly Income. Maybe I should consider putting a little in the Dividend Growth fund, too. I will definitely buy some units of the Dividend fund for my granddaughters when the next bear market hits.

In the past year, the Comfort has both lead the pack and trailed it. When one inspects its holdings, one can see the logic behind this fund. It is not a dog but it is certainly not comfortable. Aggressive? Yes. Comfortable? No. At one year it is being outperformed by the Monthly Income, a far more comfortable investment.

But do notice that all funds are down after one year. Not one of the funds being tracked is in the black. Trust me. If this were real money and it was yours, you'd be uneasy. Losing money is not easy. And the near future promises to be just as difficult, if not worse. The drop you see is not even a correction, which is a 10% drop. When the bear market eventually roars in bringing a drop of 20% or more in market value, the air will be thick with panic. If one is caught holding the wrong mutual fund, you may never get your money back.

This is what happened to my $4200 that I invested with Freedom Fifty about twenty years ago. The investment went down to $1700 and never fully recovered. I am still waiting for my $3150 guaranteed payout. If I had put the money in the TD Monthly Income fund instead, I'd have better than $14,000 today and it would be immediately available to boot.

For my kin: Volatility, Risk and Marketing

I'm going to post two images. Both show five funds I am following. The first was a screen grab from a few days ago. The second is a screen grab from today, after a sizable drop in the market.

All five funds started with an initial deposit of $10,000. And all have gained value since being opened. But note what two days of crashing market values have done to each fund.

The TD Comfort Aggressive Growth Portfolio - I is marketed as a fund with great growth potential. How a fund can by both aggressively seeking growth stocks while providing comfort is beyond me. Aggressive growth means risk and risk does NOT mean comfort. And if it can go up smartly, it can come down equally quickly. And it did. In the past two days it lost 26.5% of all its gains.

The TD Dividend Growth - D series holds a lot of solid, dividend paying stocks. It is not a great mix but it does aim for good quality. It can be volatile but still it only lost 14.8% of its accumulated gains.

The TD Dividend Growth - I series charges less MER and so collected more gains. The drop affected both the D-series and the I-series similarly but because the I-series had a smaller gain, the percentage of the gain lost was a little greater. It lost 16.7% of all its gains.

The TD Monthly Income is one of my favourite funds. It doesn't set the world on fire when the market is hot but it doesn't fall through the floor when the bottom falls out of the market. You can expect to lose a lot but this will be a lot less than many other funds. In the past two days it has only lost 10.75% of its gains. One can still sleep at night.

And lastly, the Retirement Portfolio is proving to be a dog. It only had a meager $527.36 in gains and yet it lost 27.65% of these in just two days. Its gains dropped to $381.50.

Before I let you go, note the final value of each fund. This is the Market Value column second from the left.

The two dividend funds are in the lead with the Monthly Income fund in third place. The TD Comfort Aggressive Growth Portfolio has dropped well back and is now in fourth place. The fifth place fund, the Retirement Portfolio, is not yet in the red but it is looking like it could be a big loser in a bear market. And this is what the bank sells retirees? Huh?

One last add: I talk a good line but I hate too much volatility. I can handle the ups but the downs kill me. I begin to panic when I lose more than 40% of my investment. For this reason, I try to buy safe stuff - like utilities. Banks can be good in that they almost never cut the dividend. If it is the dividend you need, then up market or down market, your day will unfold as it should.

I'm embarrassed to admit it, but along with my stocks, I own TD Monthly Income. I mix it owning it with a lot of pure equity plays. The TD Monthly Income, with all the bonds it holds, softens the landing when my portfolio crashes.

As you may have already surmised from the above two images, if one mixed the TD Monthly Income - D series with a carefully selected amount of the TD Dividend Growth - D series you keep your risk manageable, increase your gains when times are good, get a fair dividend to help tide you over during down times and keep the worst bears away from your financial door. You shouldn't lose more than 25% in a crash  -- with a little luck, probably a lot less. This is better than losing 50%. Honest.

Cheers,
Ken

For my kin: MER and other mutual fund fees.

When buying mutual funds always check the MER. Now, what is MER and why should you care?

According to RBC Global Asset Management: The MER is the total of the management fee, operating expenses (or administration fee) and GST/HST charged to a fund each year. It is expressed as a percentage of a fund’s average net assets for that year. All mutual funds and ETFs have an MER.

If a fund gained 4% last year but paid a MER of 3%, you, the investor in the fund, would realize a return of only 1%. If two funds are identical except for the MER, the one with the lower MER returns more to the investor.

D-series TDB3088 has a MER of 1.19 while TDB972 has a 2.02 MER.

TD offers some funds as both investor series funds and as D-series funds. The D-series funds are only available to investors with self-directed investment accounts. Funds in the D-series have lower MER charges compared to the comparative I-series version.

Recently, I compared five funds. All funds opened with an original investment of  $10,000. Note: the two Dividend Growth funds are identical except for the series. One is an investor series while the other is a D-series.

The D-series fund has a MER about 0.8% less than the very similar I-series fund shown.

The D-series fund returned $285.48 more to the investor than its I-series counterpart. That's a nice reward for buying and selling your funds directly without the aid of a middle man at the bank.

TD Dividend Growth Funds compared: fund with lowest MER performs best.

A general rule: always pay as little MER as possible.

What else should one watch for when buying mutual funds? Answer: sales commissions, known as loads. Try and only buy no-load funds which have no sales commissions added when being purchased or sold. I try to stay clear of both front-end load and back-end load funds as both increase costs.

Is that it? No. Generally, mutual funds are not sold for quick trading. If mutual fund units are sold too soon after purchase, a short-term trading fee is charged. This fee deters quick and frequent trading of funds and the associated trading fees a fund would accrue. How soon is too soon? Usually, one must hold a mutual fund for a minimum of thirty days to avoid short-term trading fees but check this and confirm with each individual fund.

Lastly, there are a few funds designed for short-term investing. An example would be money market funds. Such funds are often excluded from the short-term trading charges. I park free cash in a money market fund, TDB8150, a TD Investment Savings Account. Today TDB8150 is paying 1.35% daily. That's not much but it's better than earning zilch.

You may lose in the short term, so be prepared.

Back in August TD was calling H&R REIT a Buy. I liked reading that as I have held that stock for quite some time. It has gone up and it has come down, but while oscillating up and down it has never reached its target price. I read the August prediction and felt my faith in this stock was well placed. I'd soon be in the black.

What is H&R at today (Oct. 1, 2018)? Would you believe $19.71. Heck, it was at $20.36 back in August. (And it is dropping even more as I write this post)

My point? Buying stock is not without risk. No matter what analysts are saying, their predictions can be wide of the mark. If you are getting into the market, be prepared to lose money as well as make it.

Do your homework and if you bought quality with a nice, safe dividend as part of the deal, hold on. You will eventually come out O.K. and you will get paid nicely for your patience.

I like to think that my investment in HR.UN pays me a 7% yield. I don't dwell on the loss. And, if it drops 10% or more from its recommended price, I'll re-evaluate the stock and, if it checks all the correct boxes, I'll possibly buy some more. I'll have averaged down. I'll sell the shares that push me over my allocation when the stock climbs out of the cellar. I don't like to hold more than my allocation for any stock. I aim for diversity.

And how long do I anticipate holding on to a disappointing stock purchase. Answer: from eight months to two years but it can be longer. With H&R REIT yielding more than 7% annually, I can hold on to it indefinitely. In retirement, I need the income to live and it is delivering. To that extent, my investment in H&R REIT is a success.

(I has another stock that performed very much like H&R REIT. That was Suncor. It went up and it went down but never hit its target. After years of holding it, it climbed above my purchase price and I bailed with a little profit and all the dividends paid over the years, of course. Free of the stock, I sat on the sidelines and watched it climb to about twenty percent above my original price. I didn't mourn my selling. I was happy to be free of it.)