Let’s talk a little about investing with Investors Group, which is one of Canada’s largest wealth management companies. It has approximately $130 billion in assets under management, or about what I have hiding in the couch cushions for a rainy day.There are some 5,000 Investors Group
advisors sales people spread out across Canada.
The investing process starts with a financial plan, which goes over all parts of your finances from your mortgage to your insurance to your investments. The client is told the process is so their needs can be fulfilled in the best way possible. This is a lie. It’s a sales process, nothing more.
Recently, Investors Group has been in the news for a couple of main reasons. The first is the company’s opposition to Canada’s new mutual fund disclosure rules. Before, disclosure of fees in a percentage form was fine. These days, fees must be disclosed as an actual dollar figure.
The company also made headlines for announcing it was doing away with deferred sales charges. This meant investors who get out of Investors Group mutual funds before a certain time period (usually 5-7 years) don’t have to pay huge penalties any longer. Such generosity! The company also cut fees on many of its in-house mutual funds.
Investors Group is actually really excited about this. Veteran investors know you should never invest with Investors Group, but there are literally millions of Canadians who don’t know any better. This post is for you.
An apples to apples comparison
Let’s take a closer look at one of Investors Group’s largest funds to see just how serious the company is about cutting fees.
The largest IG mutual fund is the Investors Dividend Fund. Because this company likes making things complicated, there are about a million different slightly different iterations of the same damn fund.
After a little clicking around, I’ve come to the conclusion that you’d be most likely to be sold is the Series B. It no longer has a deferred sales charge and the prospectus breaks down what the advisor gets paid in great detail.
The fund has 88% of its assets in Canadian equities, with the remainder in bonds and cash. It has a total of 125 different positions, but 57% of assets are in the top 10 stocks. Top positions include:
- Royal Bank (8.4%)
- Scotiabank (8.1%)
- TransCanada (6.0%)
- CIBC (5.7%)
- Power Financial (5.6%)
- Bank of Montreal (5.5%)
The management fee? It was 2.48%, but the company SLASHED it, proving once and for all Investors Group cares about its investors. The new fee? It’s 2.38%.
OMG YOU GUYS I’D BETTER GET THE FAINTING COUCH.
In 2016, the fund paid a distribution of $0.77, giving it a yield of just over 3%.
Now let’s compare it to the largest Canadian dividend ETF, which is the iShares Dividend Select ETF (TSX:XDV). It has 100% of assets invested in Canadian stocks. The largest positions include:
- CIBC (8.2%)
- Agrium (7.6%)
- Royal Bank (5.8%)
- Bank of Montreal (5.7%)
- Scotiabank (5.0%)
59% of XDV’s assets are invested in the financial sector. The Investors Dividend Fund has 57% of its assets invested in financials. There’s a lot in common between the two funds, not just that. They’re not identical, but damn close.
XDV has a trailing yield of 3.7%, a full 20% higher than the Investors Dividend Fund.
Where XDV really shines is its management fee. Investors are paying 0.55% annually to own XDV. That’s a full 78% less than owning an equivalent product with Investors Group. (And 0.55% is a little expensive in the ETF world. You can find ETFs for less than 0.10%).
We could look at other fund categories, but it would yield similar results. If you invest with Investors Group, be prepared to pay a hell of a lot more for something that can easily be replicated with a cheaper ETF.
Just don’t invest with Investors Group
Investors Group does a great job of presenting themselves in a professional manner and the average advisor will instill a sense of confidence into a newbie investor.
But ultimately, that comes at a huge cost to the client. A 2% difference in fees will make a huge difference in your retirement.
The bottom line? You’re better off to choose a simple ETF portfolio on your own. You’ll save tens of thousands of dollars in fees (if not more!) if you don’t invest with Investors Group.
Those of you who show up here multiple times a day (God bless your pathetic hearts) have probably noticed that I didn’t post any content on both Tuesday and Wednesday. Well the joke’s on you, because I really did. I just posted it with invisible ink.
Back in August, I made the decision to update this here blogening every weekday, for a number of different reasons. The biggest was I wanted to turn Financial Uproar into part of your daily routine. The Canadian finance blog-o-net is really missing such a thing. It seems like everyone else has embraced the less is more business model.
The plan was to eventually up the traffic to the point where I could sell premium products. And for a while, it was working. Between August and February, traffic was up 125%. People actually started to comment and email and ask me questions on Twitter. It was a fun time, albeit a little exhausting.
Naturally, the time commitment went up too. I went from spending ~5 hours a week on this thing to 15-20 hours. Which was fine. I had the time, and it was mostly enjoyable. It still is, actually. Talking to you guys without a filter is fun. Damn ass hell bitch fun.
There was just one problem. The Uproar didn’t make any additional money.
I found myself in an interesting conundrum. I needed to hire somebody to write blog content so I’d have time to create premium stuff. Except the blog wasn’t making enough money to do that. Besides, I make my living writing stuff for other people. I’d be paying people to do my job.
I could hire people to try and really supercharge this thing and turn it into a business. Or I could step back and spend more time on the websites that did pay me. The choice was risk capital for a large potential reward or take the potentially smaller reward today. I chose the coward’s way out.
So what’s next?
I’m not going to abandon you kids. Financial Uproar will still be active. It just won’t be every day active. In fact, there won’t be any set schedule. I’ll just post whatever I want, whenever I want. There will be more of a focus on my own personal decisions rather than generic SEO-type stuff.
The plan is to spend the 10-15 hours a week in extra time I’ve created searching for new income streams, focusing on the kind of stuff that requires semi-active management. I figure this will make fun blog fodder and will be a good use of my time all the same.
In short, Financial Uproar will go from being a business to the place where I talk about my other business. I’ll do a write-up when I buy a new stock or buy a piece of real estate or whatever. I won’t keep up the weekly link dealies, but I’ll probably do one every few weeks rather than every week. It’s much easier that way.
And that’s about it. See you kids next week.
Oh boy! It’s my click-baitest title ever!
Now before all you kids pelt me with soft, over-ripened tomatoes, allow me to explain. OH GOD WHY WON’T YOU ALL LET ME EXPLAIN.
Many people (myself included) think reading is a huge part of one’s success. A book is one of the best investments you can possibly make. For a price as low as zero dollars (thanks library!), you can get lessons it took great men decades to learn condensed down into a chapter or two. All it costs is a little time, which probably would have been squandered anyway.
What a fantastic return on investment.
There’s just one problem. Books promote a culture of inactivity. There’s an army of people who are nose deep in a book right now, trying to discover the true secret to getting rich. If only they read enough, they say, they’ll figure it out. It’s gotta be in here somewhere.
It won’t be. No book will ever contain the true secret to getting rich. Because ultimately, getting rich involves one thing.
There’s definitely a correlation between reading and becoming wealthy. There’s no doubt about that. Buffett reads a ton. So does Charlie Munger, Bill Gates, Charles Koch, and most other billionaires.
But there are notable exceptions. Let’s start at the top.
“Well, you know, I love to read. Actually, I’m looking at a book, I’m reading a book, I’m trying to get started. Every time I do about a half a page, I get a phone call that there’s some emergency, this or that. But we’re going to see the home of Andrew Jackson today in Tennessee and I’m reading a book on Andrew Jackson. I love to read. I don’t get to read very much, Tucker, because I’m working very hard on lots of different things, including getting costs down. The costs of our country are out of control. But we have a lot of great things happening, we have a lot of tremendous things happening.”
Yes, that quote is from the leader of the free world.
Much as we crap on Donald Trump, and much as Trump deserves it, he has been remarkably successful in his life. After becoming the most famous real estate developer in the world, the guy became a best-selling author (despite not even writing the damn book!). He followed that up by becoming one of the biggest stars on reality TV. And then, as an encore, the dude became the president of the freaking United States.
Trump’s secret to getting rich wasn’t reading or waiting for the best opportunity to strike. He simply went out and did stuff.
There’s an old expression about overnight successes. It takes 20 years of toiling in obscurity to become an overnight success. Guys like Donald Trump may have accelerated the process a little, but the point is still valid.
Here’s what happens. Somebody works hard at something, and then they get a little success. They keep on going and get a little more momentum. They keep building and building until these small successes start becoming medium-sized. And so on. By the time any of us notice, this person has already moved up to big things.
Meanwhile, the voracious reader is stuck at square one, still searching for the magic bullet. If only he read more books! Then he’d find the true secret to getting rich! It’s gotta be in one of these books somewhere…
There’s no secret to getting rich
Look, you all aren’t stupid. You’re smart people who are ambitious enough to try and improve your lives. You’re the best people, and I’m not just saying that because y’all read my thoughts every day.
Everyone reading this knows how to get rich. The secret is no secret. You have to create capital and put it to work in interesting opportunities. That might be through an index fund. Or it could be buying a trailer park, investing in private mortgages, or starting your own business. Part of the fun of this whole exercise is there’s no set path. There are just a number of similar guidelines everyone follows.
The closest thing there is to a secret is to just go out there and do stuff. If you already have the tools, it all comes down to execution. Don’t be the person who doesn’t do anything, paralyzed with his nose in a book. Research is encouraged, but all the research in the world doesn’t matter without taking risks.
A fortnight or six ago, I told you kids about the passive income source which are junk bonds. Skip the next paragraph if you’re already well aware of said asset class. If not, prepare to get your face educated RIGHT OFF.
Junk bonds are debt instruments issued by companies that are down on their luck. Individually, they’re pretty risky, but can also lead to some pretty exciting profits when you get the trade right. They’re much safer as a group, so I usually suggest y’all buy a junk bond ETF or a closed end fund.
I own the Dreyfus High Yield Strategies Fund (NYSE:DHF) because it uses leverage to really goose the yield from its portfolio of junk debt. It currently pays a dividend of 9.6%.
One thing I didn’t focus on when talking about junk bonds before was the ideal time to buy. If you’re buying the asset class as an income play, you shouldn’t really care about underlying price movements. As long as you’re happy with the yield, just let the price flap around like the Simpsons watching Japanese cartoons.
That was short-sighted. It always matters what you pay for an asset. Getting yield is nice. Getting a sweet capital gain along with an outsized yield is even nicer. It’s like an extra scoop of ice cream. Nobody says no.
It turns out there’s a really easy way to predict the return of junk bonds going forward. Seriously, it’s uncanny.
Junk bond return indicator
Here’s how it works. Junk bonds will always trade at a premium yield versus other bonds, because they’re riskier. Duh, right?
You’d also think this premium would remain relatively steady over time, with junk bond yields rising and falling with interest rates. This happens a lot of the time, but there are also issues that only impact the junk bond market individually.
One example today is the energy sector. A lot of energy bonds have entered junk status because oil remains under $50 per barrel. If the price of oil falls, the entire junk bond sector can get hit.
Junk bonds also will rise or fall depending on the general economic outlook. Even though the asset class tends to perform pretty well as a group, when the economy suffers, investors run away, convinced every junk bond is going to go to zero.
Like with any investment, the key to buying junk bonds successfully is to get in when they trade at a huge premium to safer bonds and get out when the gap narrows.
The St. Louis branch of the Federal Reserve keeps track of the spread. Let’s take a look at the last 10 years worth of numbers.
We’re obviously not going to see 2009 numbers anytime soon, but let’s focus on late-2011 and early-2016. Both times, the spread between safe bonds and junk debt peaked at about 9%. It was a good time to get in.
Looking at a long-term chart of NYSE:JNK, the largest junk bond ETF, confirms it.
If you would have bought in October, 2011, and sold in 2014, you’d be looking at a capital gain of at least 10%. Plus the nice yield. The capital gain had you bought in early 2016 would have been similar.
You’ll notice that while today probably isn’t a good time to buy junk bonds, the spread in 2007 was even lower. You can see what happened next. It works as a contrarian indicator as well.
Yes, it really is that simple
Sometimes, investing can be easy.
To ensure capital gains when buying junk bonds, buy when the spread approaches 10%. It worked in 2011 and 2016, and even would have worked out well in 2008, assuming you didn’t panic and sell when the spread went over 20%.
With the spread being so low today, I’d recommend against buying. Getting a decent yield is nice. Getting a decent yield with upside is better. Remember, capital gains matter too.
Everyone, meet my new friend Jerry. He’s a true millionaire next door.
Jerry is a long-time Financial Uproar lurker who I recently met on a trip to Calgary. Like me, he’s accomplished a lot without actually going to university. Jerry started out working as a grunt on construction sites before being offered a job as a plumber’s apprentice. Four years later he had his journeyman status and was making a good wage.
He worked for the same company for a decade before the old owner decided to retire. Unable to find a buyer, he simply shut down the company. Seizing the opportunity, Jerry immediately hired three of his most useful co-workers and started his own plumbing company, knowing he already had a bunch of potential customers. That was in 1998, which was pretty much the best time to start a plumbing company in Calgary.
Nearly 20 years later, Jerry’s plumbing outfit has a half dozen employees and regularly earns Jerry between $100,000 and $150,000 a year. He has a net worth of $2.5 million despite his wife not working for the last 25 years and two kids who “eat too damn much.”
Jerry truly is a millionaire next door, so naturally I had questions. Lots of questions. Fortunately, Jerry was comfortable answering, as long as I didn’t reveal anything too sensitive.
Here are some of Jerry’s best financial tips.
Buy a house
OH SNAP WE’RE GETTING ALL CONTROVERSIAL IN HERE ALREADY.
Jerry is a huge fan of owning your own home. Even in today’s overpriced real estate market.
“I understand it’s cheaper to rent today, especially in my neck of the woods” he says, “but when I sign up for a mortgage I know the cost of ownership is going to stay relatively close to the same. Just be smart when buying and you can handle a rate hike.”
Besides, Jerry loves his home for another reason. It gave him an asset to borrow against when he started his plumbing business. He reckons his $50,000 in startup capital is worth at least $250,000 today.
Conservatively value your net worth
Jerry has an interesting way of calculating his net worth. He excludes his house and his business, even though they’re worth about $750,000 combined. Why?
His business is an easy one. He says he basically “bought himself a job” by starting his own company, although he admittedly doesn’t work very hard. He’s the flex employee. If there’s too much work for his existing team, then he goes and helps. He says he’ll be grateful if the business sells for anything when he decides to hang up his wrenches.
As for his house, Jerry figures he needs a place to live anyway. He’ll book the value on his net worth once his high school-aged kids move out for good and he sells. The plan is to downsize to a condo or townhouse partly so “my kids don’t decide to move back in.”
Speaking of Jerry’s kids, he has no interest in them making their own way through school. Both have $50,000 waiting for them upon graduation from high school, but with one caveat. They must go to university (or trade school) in Calgary to get it.
The reasoning is simple. “We have world-class schools right here. It makes no sense to leave the city to ‘find yourself’ or other such bullshit. Find yourself on your own dime.”
Jerry also plans to give each of his kids an additional $50,000 when they buy their first home.
I asked Jerry about this parental welfare, and his explanation was simple. He agreed it could lead to a troublesome case where his kids become useless, but he would much rather help them out at the beginning of their career when they could use the money. “It makes no sense to hoard all of my money to my kids when they’re 50 and already well-established.”
Jerry’s portfolio is almost exclusively invested in dividend-paying stocks.
Jerry’s first experience investing wasn’t a good one. I’ll let him tell you the story.
I was 19 or 20 years old with a buddy with a brother who worked for some obscure mining company. I ran into the brother one night at the bar and he told me there was so much gold in this company’s mine they were practically tripping over it. So I immediately threw most of my meager life savings into the stock, which naturally started falling. After losing 80% in a few months I couldn’t take it and cashed out.
Jerry started investing in mutual funds, but decided he’d rather invest himself. He stuck to blue-chip stocks that paid a dividend. He owns between 40 and 50 stocks today, mostly in Canada. Most of his net worth is in stocks. Top holdings include National Bank, Fairfax Financial, Extendicare (partly on my recommendation), and Telus.
Gerry’s goal was always to create an income stream in retirement. He was especially delighted to know the tax bill on these dividends will be virtually nothing.
But Nelson… these tips aren’t that exciting
Perhaps the biggest thing I took away from my conversation with Jerry is there’s no magic bullet needed to become a millionaire next door. He just plugged away at life, made smart decisions, and patiently waited for his net worth to head higher.
As much fun as it is to ask guys like Jerry their secrets, ultimately we already know a lot of them. There’s no secret sauce to becoming a millionaire next door. We all already know the steps. It’s all about execution and staying motivated.