Warren Buffett once said, "If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy."
Index fund investors wouldn't say they're patsies – and for good reason. Index funds are cheap. They stomp the performance of most actively managed funds. But the word "patsy" could still describe most index fund investors.
Measured in U.S. dollars, Vanguard's S&P 500 index averaged 8.2 per cent per year during the 10 years ending April 30. That's a good return after fees. However, the typical U.S. investor in that same fund gained just 6.37 per cent.
There's one reason for that.
Investors sabotage their hands. Instead of adding regularly to their investments or just buying and holding, they often try to guess when to buy and sell. Without meaning to, most buy high and they sell low, leading investors to underperform the very funds they own.
First Asset and iShares Canada may have solutions to this madness. In each case, they offer portfolios of indexes wrapped up in a single exchange-traded fund. Such ETFs might protect investors from themselves.
Similar products have been popular among Americans for more than a decade. They seem to encourage investors to either buy and hold or dollar-cost average. According to Morningstar, the average investor in each of Vanguard's Target Retirement Funds has outperformed the funds they owned over the past decade.
Take Vanguard's Target Retirement 2035 Fund.
It blends stock and bond market indexes into a single fund. Each year, it gets rebalanced.
Over the past decade, it averaged 7.04 per cent per year after fees. Its investors, however, did even better. They averaged 8.65 per cent. As a result, they beat the typical S&P 500 investor by 2.28 per cent per year.
Vanguard has four Target Retirement Funds with 10-year track records. Over the past decade, the average investor in each of these funds outperformed the funds themselves.
Ten Year Fund Returns Versus Investors' Returns
10 Year Fund Return
10 Year Investors’ Return
Including all target funds returns with 10 year track records
Many investors build their own portfolio of ETFs. But not everybody should.
If you can't handcuff fear and greed, there are a few low-cost options that could still make you a winner.
First Asset offers its Canadian Core Balanced ETF (CBB.TO). Because it is diversified among stocks and bonds, it would be far less volatile than most equity ETFs. As with Vanguard's Target Retirement Funds, it could prevent investors from doing something silly.
It contains a blend of approximately 40 per cent Canadian bond ETFs and 60 per cent Canadian stock ETFs. First Asset uses a component of active management to capitalize on value stocks, growth stocks, high-dividend payers and low-volatility stocks.
"The costs are quite low and will fluctuate depending on the allocation of ETFs within it," said Rohit Mehta, First Asset's senior vice-president.
The company overweights or underweights factors as they see fit. Currently, the ETF's total management cost is 0.67 per cent per year.
First Asset's Canadian Core Balanced ETF doesn't include global stocks and bonds. If that's what you're looking for, iShares Canada has some broader options.
Their Portfolio Builders and Core Portfolio products include a Balanced Income Core Portfolio (CBD), a Balanced Growth Core Portfolio (CBN), a Conservative Core fund (XCR), a Growth Core fund (XGR), an Alternatives Completion fund (XAL) and a Global Completion fund (XGC).
"The breadth of asset classes that are captured in these portfolios include mainstream investments such as Canadian preferred stocks, REITs [and] real return bonds, as well as more difficult to assess or niche asset classes such as high-yield bonds, emerging market debt and global REITs," said Pat Chiefalo, managing director and head of product for iShares Canada.
iShares rebalances the funds to maintain what it considers the optimum allocation. Management fees range between 0.63 per cent and 0.78 per cent per year.
Low fees matter – but so does smart behaviour. Sometimes we need to check our egos at the table. A single, diversified, blended ETF may be the best way of doing just that.