Gone are the days when, after 35 years of loyal service to one company, an employee retires with dignity, a defined benefit pension and a nice watch. Today, most employers are not on the hook for guaranteeing any retirement income, and we know Old Age Security and Canada Pension Plan payouts aren’t very much. For these two reasons retirement is nothing but a huge question mark for the average Canadian.
Replacing working income in retirement requires planning ahead and solid investment returns.
Mutual funds have been the ‘go to’ investment product for Canadians for a long time. They offer immediate diversification and are bought and sold easily. Unfortunately, (a) the fees associated with owning them are amongst the highest in the world; and (b) the majority of investment advisors sell them without considering lower cost alternatives.
Putting together a diversified portfolio does not need to cost 2.4% – the average fee Canadians are quietly paying for their mutual funds. [Many aren’t aware of the fees though, because they are buried in the performance of the funds]. I am rarely surprised when I hear that someone’s mutual funds are doing poorly – fees eat into performance. The average mutual fund needs to “beat the market” by at least 2.4% just to keep up with the market each year. Not easy. And in fact most don’t, in part because of the fees charged.
The good news: There are some great alternatives that offer similar benefits without the high fees.
The world of passive investing (also called index investing) is large and growing fast. Exchange Traded Funds (ETFs) are available to investors looking to improve their returns by reducing fees and eliminating the guess-work involved in picking the right mutual fund. They are just as diversified (often more so) as your typical mutual fund, and simply replicate the performance of large market-wide indices (like the TSX or S&P 500) by investing in the same proportions of stocks as these indices hold.
If this is an area of interest, you should learn more by talking to a trusted financial professional, and by doing your own reading and research. Who knows, passive investing could be just what you are looking for.