Want to clip your investing expenses without sacrificing returns? Try passive investing. Also known as couch potato investing, easy chair investing and lazy investing, the plan is to make money without having to pick individual stocks. You simply buy index funds and exchange traded funds.
But do you really make more money than an investor who pays a fund manager to pick stocks for their portfolio? And how do you decide which funds to buy?
Ask Ram Balakrishnan, who has been writing the widely read Canadian Capitalist personal finance blog for five years. The online discussion goes live at noon (ET) on Monday, but you can get a jump on the queue by submitting your question here.
Ram Balakrishnan
Mr. Balakrishnan works as a software developer in Ottawa, where he lives with his spouse, a consultant for the federal government, and twin sons. He has a degree in electrical engineering and says all his financial knowledge is self-taught or learnt in the school of hard knocks. He lost a lot of money when the technology bubble burst and resolved then that he would educate himself on investing.
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Sonali Verma, Globe Investor: Hello, everyone, and welcome to our discussion! We've got Ram Balakrishnan, the brain behind Canadian Capitalist here today to take your questions. Thanks for joining us.
Mansoor Asif writes: I wonder which is a better long term investment now. Buying a flat for rental returns or equity mutual funds. Can you advise?
Ram Balakrishnan: It is very difficult to compare rental real estate with equities. Real estate is extremely local – a rental investment in one area of town might provide very attractive returns compared to another just a few blocks away. Also, the risk / return characteristics of real estate and equities are quite different.
That said, it seems to me that stocks – i.e. a globally diversified, low-cost portfolio might provide better long-term returns just because the past decade hasn’t been a happy one for stock investors.
An online reader identified as Marp writes: ETF's are an excellent idea but you do have to do some homework in understanding the details behind the individual funds such as costs and how close they mimic the index they are based on. A review of most managed funds will tell you that you they are not worth buying.
Just look at there 5 and 10 year returns and you will see that most of them collected more in fees than they paid out. Even worst, they collected there big fat fees even when you lost money. The ETF's collect there fees but they are much smaller.
One of the biggest problems with Mutual funds are that the people selling them are far more skilled at marketing (the art of selling something to you) than investing money (the art of making money with your money). IMO you really have 2 choices - do your homework and look after your own investments or at very least take a strong interest or put your money in guaranteed investments such as GIC's and Canada/ provincial savings bonds. Yes the rates are currently low but every thing goes in cycles which means they will go back up in the future. Investing is no different than anything else, a little homework can save a lot of headache! ;-)
Ram Balakrishnan: It is true that the average mutual fund sold to investors is expensive and investors would keep more in their pocket by investing in low-cost alternatives. Expenses are the low-hanging fruit and the easiest to control.
I would add that there is another factor that is a lot harder to handle: emotions. Investments seem attractive after they have run up sharply and very unattractive after they have fallen sharply. Many studies have shown that investors do not achieve anything close to market returns. Controlling emotions is a lot harder but investors must master it if they want to be successful. Otherwise, like the commenter says, they might be better off in GICs or bonds.
