This is a video post by Ed Rempel.

Financial Planning is not about the money itself. It is about what the money will do in your life. This video will highlight why you DO NOT get financial security by paying off debt and safe investments. It comes from having a huge nest egg.

[youtube_sc url=”http://www.youtube.com/watch?v=5KQH88o8QdU” title=”Financial%20Security%20comes%20from%20a%20huge%20nest%20egg”]

Question: From your experience, how do people really benefit from financial planning?

Financial planning is not about the money itself. It’s about what the money will do for you in your life. A plan is not a bunch of numbers – it is about your life. Our clients find that our planning meetings are actually fun.

For example, we ask clients: “What’s important about money to you?” The #1 answer we get is security. They want to know there will always be enough income for their family, for emergencies, or for things important to their lifestyle.  A plan can help you and your family achieve financial security.

Question: Can’t they get financial security without a plan?

We find most people that want security do exactly the opposite of what they need to do to get it. The common mistake people make is to think they can be financially secure by paying off debt and having safe investments.

We call it this the Zero Plan. Their goal is to retire with zero debt, zero investments (nearly), and zero income (except a bit from the government). Investing very little money and buying low return investments means you never build up much of a nest egg.

Real security: comes from having a huge nest egg.  I’ll give you a simple example. Who is more secure?

  • Person A: With no mortgage or.
  • Person B: With a $200,000 mortgage and $1 million in investments. That’s what real financial security is.

Question: How do you get financial security then?

Building a nest egg probably means you need to invest in the stock market. It does not have to be scary, though. You can invest successfully and safely in the stock market. Here’s what you need to do:

  • First, you need to think long term. The growth of the stock market has been quite consistent if you invest long term.
  • Second, you need a solid investment strategy. Our strategy is to hire the world’s best investors. We call them, “All Star Fund Managers”. Knowing they are investing for us gives us confidence.
  • Third, you need a long term, written plan so you know what you are doing.
  • Fourth you should work with one financial planner you trust.

In short, you do NOT get financial security by paying off debt and safe investments. It comes from having a huge nest egg.

“Disclaimer: Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Opinions expressed are the personal opinion of Ed Rempel.”

About the Author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website EdRempel.com.  You can read his other articles here.

136 Comments

  1. Chris on November 6, 2012 at 12:38 pm

    These commenters are funny. A financial planner is a service. A lot of people have no clue about retirement, insurance, tax, estate planning, etc. Obviously, commenters on this site are more likely to be more educated at some of these things and have no need for a financial planner. The others that need assistance go to a planner & pay the fee. If you have no clue how to do something yourself you hire it out or learn it for yourself.

    FYI – there are many, many funds out there that beat their index consistently with less volatiity. If you want to guarantee that you never beat an index, buy an index fund.

  2. Keeping It In Perspective on November 6, 2012 at 1:25 pm

    This post discussion has been skewed to discuss the value of financial planners on the whole. I think some good points have been raised by the readers here who are generally index or dividend oriented in their investment strategy. Goldberg asked Ed if financially savvy people will find value in the additional cost of advice +\- active management.

    Let’s break these down into two discussions:

    1. Cost of advice
    Most readers here are in similar situations where they are employing fairly standard personal finance strategies of debt reduction, living below their means and then passive investing for the long run.

    First I want to point out that we as readers have to acknowledge we are a skewed portion of the overall population who have taken an active interest in becoming financially literate. I think it is absolutely false to make the statement that all financial planners are bad and are all salespeople bottom feeding on society. For anyone here to tell someone who is not financially literate to just go start reading books/blogs and never find a financially planner is giving BAD advice.
    Becoming financially literate may be the superior option, but the reality is the MAJORITY of the population won’t do this and will be financially worse off with no one helping direct their financial future. As a physician, I tell people daily how to prolong and improve their quality of life with simple things and it is a small minority that heed this advice.

    2. Now for financially savvy people there are 3 distinct roles for the cost of advice and the value depends as always on individual circumstances here.

    A) if you are an employee for a company and taxes are deducted at source, then planning becomes fairly simple. Self employed individuals have more planning options and I find personal finance blogs have less good advice here. Through seeking professional advice I have found superior planning options than found through standard blogs and discussion boards. I will acknowledge this has more to do with accounting, but a good financial planner should be aware of tax consequences of investments in my opinion.

    B) Behavioral Finance – this aspect of investing is often overlooked. When someone employs buy and hold index investing for the long term this can lead to excellent results. the problem is that as we get more financially savvy, investors tend to gain confidence in their macroeconomic predictions and change investment patterns based on this.
    As a financially savvy reader, have you never sold/switched any index investments (not including for rebalancing purposes)
    Have you never chased dividend yield and bought a bad company that tanked?
    Have you never held off on purchasing investments or moved to cash when economic doom/gloom is in the news?
    Do you have a small “play” investment account where you try and generate your own alpha via stock picking? Has this account gotten larger than you would want?

    The above may or may not affect you, but having an additional step through a good financial planner instead of direct access to a brokerage account CAN ameliorate some of these poor behavioral investment decisions.

    C) As FT gains net worth and finds his investable assets move above $1 million ( getting close) he will have more complicated personal finance decisions to make.
    He will find that the blogs he reads and researches are limited in their advice for higher net worth individuals. He may find that continuing his current strategies will continue to work, but he will likely suffer from inferior wealth protection and accumulation if his investments remain in largely long stock investments only.
    Alternative asset classes show less volatile superior returns in the long run through improved diversification. These more complicated investment classes require higher due diligence and investment advice has value here.
    Large estate planning and wealth protection is also more complicated and unlikely to be appropriately addressed via personal finance blogs/books. Specialized investment advice adds value here as well.
    I personally think a reasonable portion of financially literate readers will have investable assets greater than $1 million by the 50-60’s (despite what SST thinks) regardless of income level and will have more complex finances when that time comes.

    These may be niche areas, but I believe they may have bearing on a significant portion of the savvy financially literate people here. I am not making a case for or against having a financial planner but acknowledging the total disregard for any paid financial advice is absurd. The value/cost to attribute to this will vary, but certainly financially literate people can have value from fee-based advisors on an intermittent basis.

    It is a no brainer that the average financially illiterate person is better off with a planner to employ basic debt reduction and saving strategies and this applies to the majority of Canadians.

    I will address active management later….

  3. SST on November 6, 2012 at 9:27 pm

    Paul T: “The only winners are the mutual fund companies taking your money (2-3% at a time), year in and year out irrespective of performance.”

    You mean with the big banks and financial industry pulling down record profit after record profit…that their customers aren’t doing the same and reaching millionaire status via investment accounts?
    Weird.

    KIP: “I personally think a reasonable portion of financially literate readers will have investable assets greater than $1 million by the 50-60’s (despite what SST thinks)…”

    What exactly is a “reasonable portion”?
    And exactly what generation are you referring — current 20 year-olds? 45 year-olds? Grade ones?
    As I asked Ed, please, show me the millionaires, especially those created by the stock market.
    He refuses to address the facts, so perhaps you can on his behalf.

    KIP: “As FT gains net worth and finds his investable assets move above $1 million ( getting close)…”

    Wrong.

    Investable Asset:
    Financial Assets include cash and bank accounts plus securities and investment accounts that can be readily converted into cash.

    Excluded are illiquid physical assets such as real estate, automobiles, art, jewelry, furniture, collectibles, etc.

    Investable Assets (do not equal) Net Worth

    FTs ‘investable assets’ are somewhere around the $425,000 mark*, a long way from $1,000,000. But, given he has a good 30 years ahead of him, he may just hit that unattainable $1.25 million retirement mark promoted by Ed.

    *This might not be a true figure as more than 30% of his IA are held inside an RRSP, thus to have full access to this cash it will be taxed upon withdrawal. Should this be taken into account? Who knows.

    p.s. — you might want to look up the true definition of “investment” and “speculation” as well.

  4. SST on November 6, 2012 at 9:45 pm

    KIIP: “Alternative asset classes show less volatile superior returns in the long run through improved diversification. These more complicated investment classes require higher due diligence and investment advice has value here.”

    What exactly does this mean???

    There are no “alternative” or “complicated” asset classes.

    These are the ONLY asset classes:

    Cash (and equivalents)
    Bonds/Fixed
    Equity
    Real Estate
    Commodities

    Which are the ‘alternative’ ones? The ‘complicated’ ones?

  5. Keeping It In Perspective on November 7, 2012 at 9:46 am

    @SST
    A reasonable portion implies greater than the absurdly low projection of 1% by you.5-10% of readers that are in their 20-30’s easily attain this mark in their retirement age through consistent savings and compound growth (except possibly the lowest income levels or single earning households)
    If you believe FT won’t have $1 million in investable assets by age 60 then you are demonstrating your lack of basic financial acumen.

    If you look up the formal definition of investable assets it excludes real estate and individual business interests. In the context of the article, Ed did not use the term investable assets in describing having a large nest egg. He can correct me if I am wrong but he is likely implying all forms of investment that can generate growth or income which would not include someone’s primary residence. My personal feeling is owning 4 paid off rental properties each worth $250,000 that generate income should be included as part of your nest egg/net worth.

    Finally your question on what an alternative asset class is quite striking in demonstrating your limited knowledge of types of investments despite your regular sermons on superior personal finance management to MDJ readers.
    An alternative asset class needs to be non market correlated (ie not long market oriented) As mentioned, these become more applicable for higher net worth investors with larger portfolios but can still be accessed by typical investors
    This includes:
    Distressed debt
    M&A
    Short equity
    Global Macro
    event Driven
    Arbitrage

    The above would typically be accessed through hedge fund managers of which there are a few that have funds available on stock exchanges that non high net worth investors can access. These do require higher levels of due diligence and therefore are “more complicated”.

    Private Equity is an alternative asset class and can be accessed both on the exchanges or via direct investment in firms.

    Venture capital is also an alternative asset class mainly only accessible by high net worth investors.

    As you can tell these are more complicated strategies that most individual investors do not have the expertise in self managing. I am certainly not advocating these investments for the average investor. However as portfolio size increases, these alternative forms can lead to lower volatility superior returns through diversification compared to the standard stock/bond/real estate portfolio. You can read up on David Swenson’s portfolio management book for details .

    I’ve noticed you have a knack for hijacking threads and steering them off course onto your own personal agenda. I therefore welcome your critical response but will choose not to continue debating financial concepts with you.

  6. Goldberg on November 7, 2012 at 11:01 am

    KIIP’s last post was out of context (and the opposite of keeping things in perspective!!). M&A? Distressed debt? WTF?

    The original article from Ed (and this entire website for that matter) is for people with less than $1million in net worth (or without a huge nest egg). Your post is for how to manage your millions once you’ve achieved it. Wrong website!

    Ed’s article was to advocate priotizing and aiming for a huge nest egg over debt repayment. His audience on this website are people with some debt and some savings wondering should I repay my mortgage early or invest. Ed says save a lot and invest it, and manage debt.

    I hate to tell you this KIIP but SST is right. His list of asset class are realistic for this website. Yours are for the already millionaire websites (and therefore irrelevent and out of perspective!). Try the Wall Street Journal website.

  7. Goldberg on November 7, 2012 at 11:35 am

    As for SST’s request of “show me the millionaires.” Jerry Maguire style… It’s a silly request.

    The stock market is not supposed to make anyone a millionaire. Your savings from your work are. The market is supposed to grow those savings at a better rate than many alternative would, say GICs.

    Ed’s argument is that over a few decades, your savings will 1) still exist and 2) be bigger than they would have been with a GIC. And I would agree with that.

    I disagree with him on the need for a huge nest egg (as SST says, 99.4% do not have a huge nest egg and are not living in the street). Preferable, yes; abselutely required, no. My grand-parents at 80, receive $20,000 from OAS and CPP and another $5000 from a small pension, and live a further $10,000 from savings. They never had a huge nest egg, are comfortable, secure, and happy. As 99.4% may be.

    Yes, you should save and invest as much as you can… And not be house poor… but!! not be life experience poor (so travel!) and not be health poor (so spend more on organic veggies, quality meat, and a gym!)

    And when you reach retirement, if you only have a moderage nest egg (not a huge one) yet have lived well, with good friends and family, exercised and eat well. To me, that’s success. To Ed, you should have aim for a bigger nest egg. But Ed probably works 70-80hrs a week – to each his values and priorities.

    But SST, Ed can’t show you the millionaires because he can’t force people to save more and invest more… he can only advise them to do so… as he is with us on this article… and I’m ignoring that advise. I have organic veggies and grain-fed beef to buy, and those aren’t cheap! Plus I’ll take my daughter to the park rather than doing overtime so I can’t save/invest as much… so no huge nest egg for me…

    So SST, I won’t be in your millionaire club (0.6%) but that’s my fault for not working and saving more; not the stock market or the financial industry!

  8. SST on November 7, 2012 at 11:50 am

    @FIIN:
    –A reasonable portion implies greater than the absurdly low projection of 1% by you.5-10% of readers that are in their 20-30’s easily attain this mark in their retirement age-

    By this same logic that would also then mean that 5-10% of people who are now “in their retirement age”, and older, should also have $1 million or more in investable assets.

    Where are they?
    Show me the money. That’s all I ask.

    If ALL true millionaires were in the “retirement age” demographic (65-69), they would constitute 11% of said group. This is, however, not the case.

    Sorry if you don’t accept the “absurd” FACTS and wish to make up your own reality. Good luck with that.

    –If you believe FT won’t have $1 million in investable assets by age 60 then you are demonstrating your lack of basic financial acumen.-

    Obviously you didn’t READ my post in which I commented:
    “…given he has a good 30 years ahead of him, he may just hit that unattainable $1.25 million retirement mark promoted by Ed.”

    –My personal feeling is owning 4 paid off rental properties each worth $250,000 that generate income should be included as part of your nest egg/net worth.-

    Personal Residence is NOT considered when calculating investable assets. Rental property is.

    –An alternative asset class needs to be non market correlated (ie not long market oriented) As mentioned, these become more applicable for higher net worth investors with larger portfolios but can still be accessed by typical investors
    This includes:
    Distressed debt
    M&A
    Short equity
    Global Macro
    event Driven
    Arbitrage-

    The above listed are NOT asset classes.
    Can I call up my broker (no, I don’t have one) and tell him to “Buy 100 shares of Arbitrage!”?
    Can I look up on the “Event Driven” website to see new inventory listings?
    Can I check CME for “Global Macro” prices?

    Give yourself examples of each and you will find they fall under any of these:
    Cash (and equivalents)
    Bonds/Fixed
    Equity
    Real Estate
    Commodities

    “Non market correlated” is gibberish. ALL assets have a market.
    “Not long market oriented” is short selling. If you buy anything you are ‘long’, even if it’s day trading.

    –Venture capital is also an alternative asset class mainly only accessible by high net worth investors.-

    Venture capital by definition is “long market orientated”.
    Thanks for the contradiction.

    –I’ve noticed you have a knack for hijacking threads and steering them off course onto your own personal agenda.-

    Would you rather I post an advertisement for my person business under the shady guise of an article? No personal agenda there.
    Or perhaps you would rather I just sit on my hands and whistle Dixie and not confront certain wrongs? Not rocking the boat is always helpful.

    Ed claims that people should invest heavily in stocks (and his services) in order to achieve a “huge nest egg” of $1,000,000 or more; I merely challenged his claim, with force.

    FT has total control over this website, that includes being able to moderate and edit each and every post to his liking. He has in the past edit my postings, as that is his right. Thanks to him for allowing the presentation of facts and demanding answers from the “professionals”.

    Still waiting to see the stock market millionaires…

  9. BenE on November 7, 2012 at 11:56 am

    “My grand-parents at 80, receive […] $5000 from a small pension, and live a further $10,000 from savings.”

    Dude that is a sizeable nest egg. It’s worth almost a half million dollars. Since they also receive an amount that is worth about another half million (if they were to have saved it themselves) from the government, the total savings that were made on their behalf to secure their retirement is about a million dollar.

    That’s not pocket change.

  10. Goldberg on November 7, 2012 at 2:55 pm

    @BenE

    The $10,000 comes mostly from capital, and somewhat from bond returns. It was never above $100,000. Not even close. I’ve been filling their taxes for years. I know…. I don’t know how you got half a million.

    As for the $20,000 from the government, everybody gets it and it that has nothing to do with saving a huge nestegg as discussed by Ed. And is always ignored in their calculation by financial advisor like Ed.

    So yes, it is NOT a huge nest egg, not even close!

  11. BenE on November 7, 2012 at 4:06 pm

    “The $10,000 comes mostly from capital, and somewhat from bond returns. It was never above $100,000.”

    $100,000 is only 10 years worth of $10,000 revenues. You’d have to retire at like 80 and not live more than 90 for this to be enough. Most people want to retire around 60-65 so they need to save closer to $250,000 for each 10,000 of revenues they need.

    Also, government pensions are likely to be reduced in the future since the rising amount of seniors relative to population is making them very costly.

  12. Ed Rempel on November 8, 2012 at 2:10 am

    Hi KIP,

    Thanks for the insightful perspective posts. I do agree with you that people that are not financially savvy usually benefit hugely from good advice, as do people with more complex situations such as the self-employed (especially if their business is a corporation) and those with very large portfolios, and also that some financially savvy people motivated to manage their own finances and investments may not need advice.

    The one comment I would add from seeing the finances of thousands of people is that often the people in the worst financial mess are the ones with some knowledge. A little knowledge can be a bad thing – especially if it leads to overconfidence.

    I often talk with people that say they can manage their own finances, but when I ask what they do, it is often not much more than choosing their own investments. There is little planning, taxes are not optimized, their debts may not be structured effectively, and their investments are mainly the same as what everyone is buying at the time.

    The 2 biggest issues are often planning and behavioural finance. Many people with some financial knowledge have not actually planned their retirement in detail and will end up retiring with a lifestyle much lower than they want. Without doing the retirement planning, they do not even know now that they will end up far short.

    With investments, your point about behavioural finance is right on and I think requires more explanation. People that may otherwise be able to manage their own finances but hat would make significant behavioural finance investing errors would also benefit form advice.

    It is so easy to fall into it. I can admit that even though I have been investing for several decades, I have to constantly guard against making the common mistakes. The human gut is very unreliable in investing.

    We have also found from experience how huge of an effect it can have. If you invest well for 20 years, and then sell once after a major market crash, your return is probably poor. If you buy an investment every year, except don’t buy for some reason the 3 years in 20 after a big crash, then your rate of return is probably 1/3 of what the investment earned.

    For example, the #1 classic investing mistake is selling after a market crash. We had a recent, obvious buying opportunity in March 2009 with irrational pessimism. i published 2 articles at the time: “How to take advantage of the market crash of 2008” and “Irrational Pessimism?”. The market was so obviously oversold. That is exactly what buying opportunities look like. That is the single most important time to be fully invested (or at least as much as other times).

    However, the informal poll of posts on the MDJ article was 23 people were pessimistic and 9 were optimistic.

    My point is that 23 of 32 MDJ readers that posted were probably making the classic behavioural finance error.

    This is such an easy error, because it was a scary time. We find working with clients that behavioural finance issues are one of the most significant investing issues.

    And it can be very subtle. We have a couple of cases were 2 family members became clients about the same time and had similar portfolios. When we look at them now, their rates of return are vastly different, even though they have both continued to hold similar portfolios. The difference is that one invested every year and found a way to invest a bit extra in early 2009. The other invested almost every year, but had job and other fears so he did not invest in early 2009. That is all it can take to have very different returns.

    I just thought I would elaborate on your comment, KIP. People that may otherwise be able to manage their own finances but hat would make significant behavioural finance investing errors would also benefit form advice.

    Ed

  13. Andrew Spencer on November 8, 2012 at 2:24 pm

    My apologies for taking this long to post a follow-up….work`s been busy, I got the pink eye, and I had a couple assignments due this week on the university course I`m taking part time.
    _____________________________

    Now to be clear, I don`t have a problem with financial planners, investment advisers or mutual fund salesmen getting paid for services rendered. I don`t work for free and I don`t expect anyone else to either.

    I also don`t care whether the fund manager beats the index or not. Mutual funds are just another product out there….I own a few on top of my diversified index portfolio and dividend portfolio.

    What I do care about is “financial professionals” coaching people who don`t understand the first thing about personal finance or investing to use leverage to invest. Borrowing against one’s home to invest in the stock market is not for the faint of heart. Anyone who needs someone like Ed to “guide” them fits into this category.

    Like I said on a post above, I’m not big on the government telling me what I can or cannot do with my money or who I can invest with….but in this case I do believe regulators need to step in and provide greater oversight. Check out the following article to see where I hope to see things go:

    http://business.financialpost.com/2012/10/18/borrowing-to-invest-rules-under-scrutiny-in-canada/

    What makes Ed Rempel’s particular case worse is the fact that he uses deferred sales charges (DSC) to collect his commission. For those who don’t understand what a DSC is, then please take a look at the following article produced by Rob Carrick at the Globe and Mail:

    http://www.theglobeandmail.com/globe-investor/investment-ideas/deferred-sales-charges-stealth-wealth-killers/article1375562/?page=all

    Also..this one from Jim Yih isn’t bad:

    http://retirehappyblog.ca/be-cautious-of-advisors-who-abuse-deferred-sales-charges-dsc/

    So, Ed isn’t paid by the person he’s giving the advice to…he’s paid by the mutual fund company. In turn, his reccomendations to use leverage only increase the commission he makes. If the person getting the advice needs to get out Ed’s scheme (within a certain time period), then they get the honor of repaying the mutual fund company for the commission that was paid to Ed. None of this is transparant.

    So….Ed, do you actually explain to your clients exactly what a DSC is and how it works? Are the penalties you use based on the invested value or the market value?

    Why not use a front-end load which is far more transparant? Is it because no sane person would give you 5% of their home equity for writing a plan and recommending a few mutual funds? I already know your answer and I don’t believe you.

    You say your “fee-based” service is charged as a percentage of the value invested? So you take 1-2% of the value of the person’s portfolio for recommending mutual funds and doing their tax return?

    Don’t get me wrong here…everything you do is legal. I don’t believe you’re a crook or ponzi schemer or anything else like that. I just don’t like how the industry allows you to operate the way you do.

    In guess the people who read this blog do like what you do…I’ve read thru a few of the posts above me. I guess that means I need to find my financial advice somewhere else.

  14. SST on November 9, 2012 at 12:14 am

    First in a Series of Three
    I

    @Ed:
    -“I published 2 articles at the time: “How to take advantage of the market crash of 2008? and “Irrational Pessimism?”. The market was so obviously oversold. That is exactly what buying opportunities look like. That is the single most important time to be fully invested (or at least as much as other times).

    What exactly is “fully invested”, Ed?

    How are people supposed to take advantage of these buying opportunities if they are always “fully invested” in the stock market? Does it mean throwing your 10% cash asset allocation into the stock market when there is “blood in the streets”? Or perhaps it means you, being a wise and intelligent financial advisor, advised your clients to sell pre-2008 because of all the red-flags you saw coming fast and furious, and then to re-invest that cash when opportunity rang. Or is it merely your job to keep your clients “fully invested” at all times?

    -“However, the informal poll of posts on the MDJ article was 23 people were pessimistic and 9 were optimistic.

    My point is that 23 of 32 MDJ readers that posted were probably making the classic behavioural finance error.”

    You need to extrapolate further, Ed.
    23 people were pessimistic — of the stock market.

    In 2009 I was completely optimistic with the financial choices I made, buying into asset classes which were NOT the stock market (commodities, private equity). I made some great triple-digit returns with some great tax incentives on top of it all. How did your clients holding “All Star Mutual Funds” do? Were they optimistic or pessimistic that they were fully invested? Did any of them become millionaires?

    For a comparison, you stated you sold your clients the almighty Cundill Value Fund up until 2011. All of their A-C funds 10-year annual returns barely break 4%.
    Gold holds an 18.5% annual return over the same period; silver 21.9%.
    Glad I didn’t buy any zero-return-after-inflation mutual funds.

    Over 20-years, reviled gold beats the CVF (A) 20-year annual return by a whopping 0.2%. Silver’s 20-year return soundly pummeled CVF (A) by 3.25% annually. So much for your all-star manager/stock market theory, Ed.

    **Shiny rock beat your best over the last twenty years!**

    Or do you need a longer long-term time frame?

    Great thing about living in a capitalist society is that there is more than one way to make money, and I like making more money than what Ed sells (and how he sells it).

  15. SST on November 9, 2012 at 12:18 am

    II

    @Goldberg:
    -“The stock market is not supposed to make anyone a millionaire. Your savings from your work are. The market is supposed to grow those savings at a better rate than many alternative would, say GICs.”

    That is a contradiction.
    Your savings are supposed to make you a millionaire…if you apply them to the stock market…making you a million dollars…

    Ed claims the stock market IS what makes people millionaires:

    “My point is that financial security comes from having a large portfolio, say $1 million or more.”

    “Building a nest egg probably means you need to invest in the stock market.”

    Reality is the stock market creates very few millionaires.

    -“But SST, Ed can’t show you the millionaires because he can’t force people to save more and invest more… he can only advise them to do so… as he is with us on this article…”

    What Ed is advising us to do is put our savings into the stock market because it is, according to him, the most sure-fire way to create a $1,000,000 nest egg.

    I gave an example of an 80 year-old who, over 60 years of modest/average savings applied to the stock market, would have a million dollar “huge nest egg”. But they don’t.

    The average savings rate for the past 35 years is ~9.5%.*

    The Canadian populace has done what the financial industry has sold them to do — save their money and invest in the stock market.
    Yet the industry and its “professionals” have failed catastrophically in fulfilling their advertised product — the million dollar retirement nest egg.

    Ed says this:
    “One of the fund managers we used to use until he passed away was Peter Cundill. He managed the Cundill Value Fund for 35 years with a return of 12.8%/year…”

    A savings rate of 9.5% and an investment return of 12.8%, for 35 years…and still no millionaires.

    Ed can’t show us the millionaires because they are rare, and financial industry-born client millionaires are ever more rare.

    He also doesn’t advise people to buy anything other than what he is selling, even if it is a better investment/speculation. Why would he, he wouldn’t make any money doing that.

    -“So SST, I won’t be in your millionaire club (0.6%) but that’s my fault for not working and saving more; not the stock market or the financial industry!”

    Ed would claim you are “too scared” to be a millionaire, just like the other 99.4% of the population (please re-read the above comment).

    However, you can choose to invest in other assets besides the stock market. Contrary to what Ed would tell you, stocks are not the only game in town!

    *(Very interesting to note that the national savings rate began to drop in 1982, the same year Glass–Steagall was repealed. Why save when there’s free money!)

  16. SST on November 9, 2012 at 12:27 am

    III

    @Andrew Spencer: “Don’t get me wrong here…everything you do is legal. I just don’t like how the industry allows you to operate the way you do.”

    It’s the government which allows the industry to operate as it does.
    And we all know how amazing the government is at governing, especially those with whom they are in bed.

    That’s why Canadian banks got the bail-outs they did:
    1. http://www.cbc.ca/news/business/story/2012/04/30/bank-bailout-ccpa.html

    2. http://www2.macleans.ca/2012/05/24/the-real-canadian-bank-bailout/

    3. http://www.huffingtonpost.ca/2012/04/30/canada-bank-bailout_n_1466219.html

    Can’t allow your best buddies to fail, after all. That would be anti-capitalist. Amazing that there were plenty of business that survived the ’08 crash etc., yet banks, who are supposed to be the torch bearers of the financial industry went down like a sack of hammers. And these are the same people trying to sell us the notion that we are all “richer than we think”…if we give them our money.

    The government has a different definition of “legal” when it comes to themselves and their cronies aka monied corporations. As I’ve said before, imagine if every business/trade had a ‘Zero Liability/No Guarantee’ clause attached to their product and practice — chaos. But there’s only one that does — the financial industry (and casinos).

    Perhaps there is need for third-party regulation.

    As a side note, it’s interesting that CIBC was labeled “completely under water” and was the biggest borrower (as percentage of value). I did an internship at WoodGundy. It was one of the most disgusting, and eye-opening, experiences of my life. So glad I was not “institutionalized”.

  17. Al on November 9, 2012 at 3:28 pm

    @ SST

    I fully realize I am picking on a minor point here but if you live by the sword… so why are you referencing Glass-Steagall in a Canadian context? Canada amended the Bank Act in 1987 to remove Glass-Steagal-like barriers. Canada’s savings rate does not appear to have any special relation to that year; in fact the savings rate increased from 11.9% in 1987 to 12.2% in 1988 and to 13.0% in 1989; it did not fall below the 1987 level until 1994 (I know you have the data as you correctly quote the 35 year average as 9.5%; however I reference the data source below).

    In Canada you’ll note the highest savings rate occured in 1982 (20%), this is not that surprising as in fact the Canadian 5yr mortgage rates were 18% and the 10yr bond yielded 12%; as these fell so did the savings rate; I would suggest that mortgage rates and bond rates have more bearing on the savings rate than amendments to the Bank Act.

    NB1: I am not endorsing the Bank Act 1987 nor the repeal of G-S

    NB2: I hate having to reference everything but on to keep the wolves at bay:

    Canada’s Bank Act
    http://www.fin.gc.ca/toc/2002/bank_-eng.asp

    The Savings Rate information can be found at Statistics Canada, CANSIM 380-0004; and the mortage rates and 10yr benchmark yields at 176-0043.

  18. Al on November 9, 2012 at 5:05 pm

    And to SST, once again because I dislike sloppy math; in post 64,

    “For a comparison, you stated you sold your clients the almighty Cundill Value Fund up until 2011. All of their A-C funds 10-year annual returns barely break 4%.
    Gold holds an 18.5% annual return over the same period; silver 21.9%.
    Glad I didn’t buy any zero-return-after-inflation mutual funds.”

    18.5% is the compound annual return of gold as measured in US dollars for the ten years ended Dec 31 2011. In Canadian dollars Gold returned 13.6% for the ten years ended Dec 31 2011. You might want to re-run your figures to make for an honest compairson between gold and that fund.

  19. SST on November 10, 2012 at 11:56 am

    @Al: “…why are you referencing Glass-Steagall in a Canadian context?”

    Thanks for catching my mistake.
    What I meant to write was the institution of the Garn–St. Germain Act.
    G-S instead of G-S…heat of the moment error.

    Referenced to Canada because born in America (10/1982), G-S affected markets globally by injecting a never-ending stream of easy credit into the financial system and economies. Begining with fueling the US markets to The Great Bull(sh*t) Market Ever…as well as creating many, many fundamental problems (S&L for starters) which came to a head in 2008 and continue to this day. How did it effect Canada? Overlay TSX/S&P500/DJIA charts and you’ll get the Canadian picture.

    People had less reason to save their income because i) they could substitute credit (with declining interest rates) instead, and ii) the assets they did own (eg. stocks) were rising in price (not value) at a pace which made saving less and less attractive — just like today.

    Savings rate declined, on average, 1% per year between 1982-2002; interest rates fell, on average, 0.5% annually; the TSX (keeping it Canadian) increased in price, on average, 6% for the same period.
    Household consumer debt, 1982-2002, increased 7.5% (annual average).

    @Al: “In Canada you’ll note the highest savings rate occured in 1982 (20%), this is not that surprising as in fact the Canadian 5yr mortgage rates were 18% and the 10yr bond yielded 12%; as these fell so did the savings rate;”

    When mortgage rates started to decline, savings rates should have inclined — putting more into your bank account rather than the bank’s account. Mortgage debt declined, on average, 0.5% annually between 82-02.

    @Al: “You might want to re-run your figures to make for an honest compairson between gold and that fund.”

    I could, but take a look around, we don’t like to be THAT honest in the financial industry. But if an honest comparison were to occur, shiny rock still TRIPLED the All Star Manager returns. Thanks.

  20. Ed Rempel on November 10, 2012 at 1:40 pm

    Hi Andrew,

    As I said in post #40, I think you have me mistaken for someone else. I agree with your concerns, but we sincerely try to do it right.

    Leverage is not really the topic of this thread, but it can be a very effective long term wealth building tool, but only for people that have the right temperament, long term focus, risk tolerance and enough financial knowledge.

    We are very careful who we recommend leverage to. We have people that come to us looking for leverage, but only about 1/4 of those do we consider to be a good fit for us or suitable for leverage. We also have many people that come to us looking for comprehensive financial planning, which is our main focus, and most of those are a good fit for us.

    Leverage does not require a great deal of financial knowledge, but a clear understanding of the strategy, the risks, the math, the basics of investments, historical return norms for risk and return, etc. For anyone that wants to do leverage with us, we spend quite a bit of time educating them, regardless of how knowledgeable they are, to make sure there are no important gaps in their knowledge.

    From our experience, temperament is at least as important as knowledge. For leverage to be successful, you have to have the emotional strength to be confident in the strategy even after the inevitable market crashes. We have a personal coach talk with each potential client, so we can try to understand their temperament.

    We have found that an important key is that any leverage must be part of a comprehensive written plan. We have no clients doing leverage without a having a comprehensive financial plan.

    Taking on a new client takes 30-40 man-hours of our financial planners. Working with clients to create a personalized, comprehensive plan is time-consuming to do professionally.

    That is partly why DSC makes sense for us and our clients. DSC has several distinct advantages:

    – It compensates us for a lot of planning time up front.
    – It allows clients to have personalized planning and invest without paying a fee.
    – It encourages long term investing.
    – It costs nothing for long term investors.

    When we offer clients a reduced 2% or 3% front end fee instead of DSC, they almost never take it. Why would they pay a fee when they can avoid it just by staying invested?

    We can change the investments without incurring fee for them, so they just have to stay invested in general with us long term to avoid the fee.

    The financial media seems focused on cheap advice, not on the most effective way to pay for good advice. DSC fees can be an issue if you are working with an “investment only” advisor, as explained by Dan Richards in Rob Carrick’s article, but it is designed for clients that do not yet have large portfolios to be able to have access to quality advice.

    Of course we explain all fees in detail to every client to make sure there is no misunderstanding. Signing up a new client takes a full hour of reading through every form in detail and signing it.

    I can assure you that the regulators are heavily focused on leverage. Since 2008, there have been several rounds of increased regulation. Every client that does leverage must be approved by our dealer, and the regulators audit every 2 years. Every single client we have that has done leverage has been reviewed by the regulators.

    If you have been around the financial blog world for a few years, you probably saw many financial planners and mortgage brokers marketing the Smith Manoeuvre back in 2007 and 2008. Look around now and you will see the the effect of new regulations. Most are gone now because they were not able to work with the new rules and constant oversight.

    In short, before you use your broad brush, spend some time thinking what the proper process for providing real financial advice should look like.

    The model that we have found works effectively for clients is nothing like what you described and includes:

    – Comprehensive, professional written financial plan for every client. 30-40 man-hours from our financial planning team.
    – Full service clients only. “One plan. One planner.” For example, no leverage only clients.
    – Personal coach screens anyone that wants to do leverage.
    – Education process for all clients.
    – One hour long process to sign forms and disclose all fees in detail.
    – Fee structure designed to minimize costs for clients. Long term clients pay no fees (other than the MER).
    – All Star Fund Managers as a solid investment process and to try to earn the MERs.
    – Lower fee options for larger portfolios.

    Ed

  21. Ed Rempel on November 10, 2012 at 1:44 pm

    SST,

    I agree with KIP. I’ve noticed you have a knack for hijacking threads and steering them off course onto your own personal agenda. I therefore welcome your critical response but will choose not to debate financial concepts with you.

    Ed

  22. Ed Rempel on November 10, 2012 at 2:43 pm

    Hi Goldberg (#56),

    You think that MDJ only applies to people with smaller portfolios?

    We find that high net worth investors (HNW investors) often don’t have much more knowledge than smaller investors and usually tend to make the same investing behavioural mistakes.

    HNW investors do tend to work with advisors more and do diversify more, but they tend to face more sophisticated marketing from the financial world.

    In my opinion, most products and services designed for HNW investors are more focused on an elite image to make them feel they are treated differently than the masses than on quality of advice. They are marketed by advisors with bigger titles in exclusive groups, and they are marketed packages that generally exclude the top fund managers but include some customization of the portfolio and nicer statements.

    HNW people can still benefit from financial education, just like people with smaller portfolios.

    The hedge fund strategies mentioned by KIP are an important asset class. They use stocks, bonds, futures, etc., but they are completely different strategies that can add a lot of valuable diversification.

    Hedge funds are considered to be a separate asset class because the strategies can make money in up and down markets, and because many of the strategies have little or no exposure to the direction of the markets.

    You need some financial strength to buy them, but not $1 million. The minimums vary by province, but typical minimums are investing $150,000 per fund, or $25,000 if you have an income over $200,000 (or a few other qualifications).

    The 2 broad categories of hedge fund strategies called “relative value” and “event driven” are most appropriate for diversification, because all the various strategies in these 2 categories involve being both long and short at the same time.

    For example:

    – Market neutral: Buy BMO and short CIBC. The market direction is irrelevant. You make money as long as BMO outperforms CIBC.
    – Convertible arbitrage: Buy a convertible security and short the stock it converts into to exploit pricing inefficiencies.
    – Merger arbitrage: Buy the company being acquired and short the acquirer to take advantage of the difference between the buy price and the market price.
    – Managed futures:

    The third category is “directional”, which includes strategies that can be far more volatile than stock markets. They can increase return without adding too much to risk IF they are a low correlation to your other holdings. Directional strategies include:

    Long/short: Buy some stocks long and some short to try to make money in both directions.
    Global macro: Take large bets in sophisticated strategies based on your outlook.

    These are all sophisticated strategies that should only be done by professionals. In fact, you have to be far more selective of hedge fund managers than mutual fund managers. The saying in the hedge fund industry is mostly true – with a mutual fund, it is 80% market and 20% manager, while with a hedge fund it is 80% manager and 20% market.

    The issue is that you give up the market exposure (beta) that normally rises long term. If you are a hedge fund manager doing one of the market neutral strategies and you have no skill, you make nothing. This is part of why hedge funds are all considered to be high risk investments – even the ones with very low volatility.

    However, adding a hedge fund or 2 to a portfolio when it is large enough make your portfolio significantly less volatile, without reducing your returns. It can reduce down-side risk and make your gains more consistent.

    Modern Portfolio Theory (MPT) explains this well. By adding a non-correlated investment with a similar return potential you can reduce your risk without reducing your return.

    The best place to start is with a “multi-strategy fund”, where the fund manager use a variety of hedge fund strategies, depending on what works well in today’s client. Different strategies work better in different types of market conditions.

    I own a couple of hedge funds personally that have been my best investments. But they will only be one portion of a diversified portfolio.

    Hedge funds are not a do-it-yourself investment, but they can be a valuable asset class to add once your portfolio gets to be moderately large.

    Ed

  23. SST on November 10, 2012 at 11:30 pm

    @Ed: “In short, before you use your broad brush, spend some time thinking what the proper process for providing real financial advice should look like.”

    Wishing you would do the same, Ed.

    “Real financial advice” does not mean selling clients ONLY mutual funds in the hopes of achieving a well-marketed yet very highly unlikely dream of a $1,000,000 retirement.

    It means advising them to put their money where it will gain the highest return (without ridiculous risk, of course). Keeping one’s money in a single asset class throughout their entire investment life will NEVER build wealth.

    As my example above, gold TRIPLED the returns your All Star Manager over the last 10 years (ending 2011), and equaled the return over 20 years.
    (I use gold only because you think it to be worthless and of extreme risk.)

    Of course you will never recommend your clients to buy gold because you can’t sell them gold, ergo, you don’t make any money selling them anything other than mutual funds — even if means they will lose possible gains.

    Over history there have been very real and very measurable cycles in the different asset classes (REAL asset classes, not “alternative” or “complicated” assets). A true financial advisor would recognize these cycles and advise his clients accordingly.

    (I think it is Mike Maloney who has lots of videos to demonstrate this in a basic form.)

    Make no mistake, Ed, you are a mutual fund salesman posing as a financial advisor.

    @Ed: “I agree with KIP. I’ve noticed you have a knack for hijacking threads and steering them off course onto your own personal agenda. I therefore welcome your critical response but will choose not to debate financial concepts with you.”

    I’ll try to keep my “personal agenda” limited to advertisements for my personal company, posted under the guise of ‘helpful advice’.

    My fact-based responses are just that, critical of your financial concepts, but you have failed to address a single one. Yet you go on to debate other financial concepts:

    “Modern Portfolio Theory (MPT) explains this well. By adding a non-correlated investment with a similar return potential you can reduce your risk without reducing your return.”

    Yes, Ed, I know this.
    As a matter of FACT, Ibbotson did a very lengthy study (1971-2004) to show that a 7-15% precious metal allocation in a portfolio lowered risk and increased returns. We all know that gold (and silver) have only increased in price dramatically since 2004, thus adding even more return upon lowered risk.
    That’s FORTY (40) years of worthless shiny rocks providing increased returns and decreased risk, yet I’m sure this FACT will be ignored completely when selling Modern Portfolio Theory (MPT) to your clients.

    You do debate financial concepts, Ed, but only the ones in which you believe.

    As Andrew Spencer pointed out, everything you do is legal, and the government allows your industry to operate in the fashion which it does. Thus I guess I am SOL in gunning for any type of justification of the way your industry does business (eg. promoting the gain of $1,000,000 through stocks).

    I approach these matters very heavy-handed because I strongly agree with another Andrew Spencer remark: “What I do care about is “financial professionals” coaching people who don`t understand the first thing about personal finance…”.

    Let me ask you this, Ed — have you ever had a client who paid you for financial advice ONLY? In other words, have you ever NOT sold a client one of your mutual funds and/or other financial products (or had the express intent of doing so)?

    On a final note, and as I’ve mentioned before, the owner of this website has complete and total control of content, meaning he can allow or disallow or edit any post I submit (and he has in the past).
    Hopefully he continues to value free speech, open debate, and facts.

  24. SST on November 10, 2012 at 11:33 pm

    @Ed: “The hedge fund strategies mentioned by KIP are an important asset class. They use stocks, bonds, futures, etc., but they are completely different strategies that can add a lot of valuable diversification.”

    Wow.

    Now “strategy” is an asset class???

    I’m really starting to be amused now.

    No wonder there are so few million-dollar nest eggs out there.

    (p.s. — hedge funds are NOT an asset class.
    Glad to know no one will debate this financial concept.)

  25. SST on November 11, 2012 at 11:24 am

    Here’s what I REALLY want to know, Ed:

    If there are so few Canadian citizens with $1,000,000 in investable assets (ie. “a huge nest egg”), even among those who have had the most optimal opportunities in which to create such a sum — octogenarians — what makes you think you can do what those before you in the financial industry have failed to accomplish?

    Long-term data proves that $1,000,000 cannot be achieved on a broad scale — especially from stocks alone — so why do you use “building a [huge] nest egg probably means you need to invest in the stock market” as a selling point for your business?

    Example:
    “Most families have 2 incomes, with an average family income close to $80,000.

    At retirement…they want at least $50,000/year before tax as a retirement income…would need $1.25 million…

    My point is that financial security comes from having a large portfolio, say $1 million or more. Most Canadians are scared to have $1 million in the stock market and will never get anywhere close…” ~ Ed

    You tell us that the average family needs $1.25 million at retirement but that most will never achieve that (a truth!). If most never reach the mark then why keep selling it? Do you tell your clients that they will in all likelihood never become millionaires?

    What’s more true, Ed, that we are too “scared” to put our money into the stock market or that the stock market fails to create millionaires?

    According to a well-respected research firm, assets of the average Canadian (3Q-2011), are comprised of 54% financial instruments (stocks, bonds), 40% real estate (principle res.), 6% other (durables, machinery, etc.).

    Looks as though people already have all their money in the financial markets — 90% of all non-real estate assets (in 1990 it was 84%, in 2000 it was 88%).
    Is 20+ years of increasing financial investment your definition of “scared”?

    (As a side note, what factual data and/or studies do you have to support your claim that “most Canadians are scared to have $1 million in the stock market”?)

    Perhaps Canadians should sell their houses and down-size in order to restructure their assets to become truly “fully invested” in the stock market.

    Just more critical response, take it or leave it.

  26. Ed Rempel on November 11, 2012 at 8:41 pm

    Hi Goldberg (#57),

    I am not specifically advocating that everyone should have $1 million for retirement. That figure would be different for everyone.

    My point is that everyone should work out their own number in detail. Work out the specific lifestyle you want after you retire and when you want to retire. Then use reasonable or conservative assumptions for the rate of return on your investments (which depends on how you invest) and for inflation, and add in any pensions or the government pensions (if you confident in both).

    You can use all these assumptions to calculate the number that you will need to be reasonably confident that you will have the retirement you want.

    For our clients, the number has been as low as $0 (for frugal people with 2 large pensions) and as high as $8 million (for people used to a luxurious lifestyle and saving with a retirement 25 years from now).

    If your grandparents can live okay on $20,000/year, that does not necessarily mean you can. We know quite a few people that are okay at $20,000/year – not very comfortable, but they are okay with it.

    However, most people in our generations have become used to a much more comfortable lifestyle. My parents grew up in the 1930s and have always been frugal. They always paid cash. They were married for a year before they bought a sofa. They are fine with their lifestyle – but I wouldn’t be.

    Then you need to make a plan to accumulate that amount.

    It often takes some work to develop a plan that is reasonably achievable, and also provides the retirement you want.

    We have helped more than a thousand people figure this out for their specific situation. Most of the time, the figure is over $1 million and often over $2 million, but often it is less than $1 million as well. The larger figures are usually people retiring in 20 or 30 years, so the cost of living will have doubled by then.

    Ed

  27. JJ on November 11, 2012 at 9:16 pm

    @SST
    In looking at 1,000,000 in investible assets at retirement I think it’s safe to say that it will be in future “inflated” dollars.

    When looking at how many people have 1,000,000 in investible assets now, there may not be that many. But that’s comparing present apples to future apples. Having 425,000 now is equal ~1,000,000 in 35 years from now, assuming an inflation rate of 2.5%. I have no idea what inflation was in the past or is going to be in the future however, it’s interesting when you look at it. Someone retiring with a 425,000 in savings now is roughly equivalent to someone retiring with 1,000,000 35 years from now.

    Your question regarding how many people with 1,000,000 assets now should really be: Of people investing in the stock market over the last 35 years, how many of them have amassed a 425,000 portfolio that in turn be “worth” 1,000,000 35 years from now?

    I think there’d be quite a few people retiring with 425,000 of investible assets in this day and age.

    I used this calculator for inflation:
    http://www.sunware.ca/illustrations/inflation.aspx?tempID=uj3hquzj&selectedLanguage=en-CA

  28. Keeping It In Perspective on November 12, 2012 at 4:31 am

    @SST

    Again your over confidence in your financial acumen continues to amaze me.
    Google alternative asset class and the first three links explain why hedge funds and private equity ARE alternative asset classes.

    http://en.wikipedia.org/wiki/Alternative_asset
    http://belrayasset.files.wordpress.com/2010/01/alternative-investments.pdf
    http://www.investopedia.com/articles/financial-theory/08/alternative-assets.asp#axzz2BzdKzxkl

  29. SST on November 12, 2012 at 8:54 am

    @KIIP: If you say so. Believe what ever the financial industry wants you to believe. I can’t stop them.

    If hedge funds meet the following criteria, then I guess they are an asset class unto themselves. Good luck.

    To be an asset class the investment needs:
    i) conceptually similar securities
    ii) high correlation between the various investments within the class
    iii) to be material
    iv) a quality set of available and reliable data
    v) ability to invest passively
    vi) exclusivity

    Hedge funds, private equity, “strategy”, et al all boil down to the same ol’ stuff.

    See ya at $1,000,000!

  30. SST on November 12, 2012 at 10:46 am

    @JJ (#71): “In looking at 1,000,000 in investible assets at retirement I think it’s safe to say that it will be in future “inflated” dollars.”

    Not according to Ed:

    (#3) “Most families have 2 incomes, with an average family income close to $80,000.

    At retirement, they want a similar lifestyle…which means they want at least $50,000/year before tax as a retirement income.

    If you use a rule of thumb based on the “4% solution”, you would need $1.25 million so that you can take out 4%/year and take your modest $50,000/year retirement income.”

    Thus, a couple retiring NOW would need $1.25 million to continue their current lifestyle.

    -“I think there’d be quite a few people retiring with 425,000 of investible assets in this day and age.”

    You might be correct. But they will be retiring poor, according to Ed’s calculations — $17,000 per year (before taxes; excluding union/government pensions).

    According to a recent study by an award-winning financial industry insider, the annual expenses of the average retired household (age 65-74) is ~$30,000, with 60%(!) of that money coming from the government (CPP, OAS).
    Total expenditures are less than half of the average after-tax income for Canadian household.

    Thus, in REALITY, at retirement a household needs $12,000 a year income from their investments. This requires, using the antiquated ‘4% Rule’, a “huge” nest egg of $300,000. Or, $3,300 per person saved per year over a 45-year working life (that’s cash only, no need for the financial industry).

    Hmmm…seems to me that some reality-ignoring financial advisors are over-selling their clients by 400%.

    With $300k come and gone, guess I can stop saving for retirement! :)

    @Ed (#76): “I am not specifically advocating that everyone should have $1 million for retirement. Most of the time, the figure is over $1 million and often over $2 million, but often it is less than $1 million as well. The larger figures are usually people retiring in 20 or 30 years, so the cost of living will have doubled by then.”

    First off, what double speak.
    How can it be “most of the time” $1-2+ million but also “often…less” than $1 million at the same time? Unless it is a 50/50 split (which would constitute neither “most” or “often”), it is “most/often” in ONE direction, not both.

    Do you tell your clients the historical rate of millionaires as well?
    Are the people who would be retiring in 20 or 30 years, 20 or 30 years ago, now retiring as millionaires simply because the cost of living has doubled since then? (The cost of living has doubled in the last 10 years, btw).

    In your above example, a very average couple needs $1.25 million to retire now, but would need $2.5 million in 20-30 years due to inflation.
    You mention cost of living increase but fail to mention wage stagnation/deflation (excluding union/government employees), making the road to millionairedom even more difficult.

    If millionaires were rare 20-30 years ago, and are are rare now, what data-set projections do you use to show that people have a strong chance at becoming millionaires in the future (that is, breaking the historical trend)? I’ve already mathematically shown that millionaire status won’t be changing in the next 10 years (#36), perhaps the 10 years after that will see gangbuster growth?

    Just more unanswered on-topic critical responses.

    See ya at $1,000,000!

  31. SST on November 12, 2012 at 12:23 pm

    Just so you don’t think I’m picking on you, Ed, this from one of your forward-thinking financial industry colleagues:

    “…there are time periods where stocks are a terrible addition to that portfolio. Yet inexplicably, we as planners STILL tend to suggest that it’s “risky” to not-own stocks, when in reality the only material risk is to our business and ability to keep clients, NOT to the client’s goal.”

    ~ Michael E. Kitces, CFP, CLU, ChFC, RHU, REBC (and Heart of Financial Planning Award winner)

  32. SST on November 12, 2012 at 12:47 pm

    And more:

    “Over an investing period of about 40 years…someone who avoided the 10 biggest slumps would have ended up with two and a half times the capital gains of someone who simply stayed in all the time.

    It may not be possible to “time” the market, but it is possible to reach intelligent conclusions about whether the market offers good value for investors.

    Consider the data from Professor Robert Shiller at Yale University. He tracks…”the Shiller PE”.

    It was clear as a bell that investors should have gotten out of stocks in 1929, in the mid-1960s, and 10 years ago. Anyone who followed the numbers would have avoided the disaster of the 1929 crash, the 1970s or the past lost decade on Wall Street.

    Why didn’t more people do so? Doubtless they all had their reasons.

    But I wonder how many stayed fully invested because their brokers told them “You can’t time the market.” ” ~ WSJ

    “Fully invested” is good for business.

  33. Andrew Spencer on November 12, 2012 at 3:23 pm

    Hello Ed, maybe I did get you mistaken for someone else. My apologies if that is the case.

    -Andrew

  34. Ed Rempel on November 14, 2012 at 12:45 am

    Thanks, Andrew. I appreciate you having the courage to post an apology. There is sometimes a lot of bravado on these threads, so sincere comments are appreciated.

    Ed

  35. Ed Rempel on November 14, 2012 at 1:09 am

    Hi Goldberg (#60),

    What do you mean the $20,000 from the government is always ignored by financial advisors like me? We never ignore it.

    The $20,000 from the government is partly CPP and partly OAS. It can be as high as $36,000 if both people in a couple receive the maximum CPP and OAS.

    In our opinion, the CPP is generally reliable. There is a huge pool of money built up to support it. The CPP board claims it is sustainable for the next 50 years. It is possible that with all the baby boomers retiring, they may not be able to fully index it to inflation or they may reduce benefits a bit, but we believe that for the most part it will be there.

    The maximum CPP is almost $12,000/person, but is depends on how much you paid in. The average actual benefit is just over $6,000/person.

    OAS is a different situation. There is no pool of money. It is paid entirely out of each year’s tax revenues. It is clawed back for people with incomes over about $68,000, but that is relatively high. The benefit depends only on how many years you have lived in Canada by age 65. If it is 40 years, you get the maximum of just over $6,000, even if you never worked in Canada or earned any money in Canada.

    Today, there are about 4 people working in Canada for every OAS pensioner. In 20 years, there will be about 2.5 people working for every OAS pensioner. This does not appear to us to be sustainable. That is why the government recently raised the benefit start from age 65 to age 67. We believe that it is still not sustainable, so more changes will be coming.

    They may increase the age further, perhaps to age 70. The other option, which we think is more likely, is to reduce the clawback income from about $68,000 to perhaps $30,000. Then many more people would have their OAS clawed back, which could make it sustainable.

    The problem with this scenario is that anyone that saves a reasonable retirement nest egg may then end up losing their OAS, especially if it is taxable, as with an RRSP or pension. That would fit with the spirit of Canada. We like to help people, but not if they have their own income.

    In practice, when we prepare retirement plans for clients, we usually estimate full CPP based on how much each person has contributed, but often show a lower inflation indexing for CPP. We usually include full OAS for people relatively close to retiring, such as age 50-55 or older, but tend to exclude it for younger people, especially if they will have significant other income in retirement.

    We try to include all the government benefits that we are reasonably confident each person will receive.

    Ed

  36. SST on November 15, 2012 at 1:05 am

    @Ed (#84): “There is sometimes a lot of bravado on these threads, so sincere comments are appreciated.”

    A sincere fact is that the average long-term (1929-current) growth trend in North American millionaire population is 2% per annum (probably less in Canada than the US due to heavier taxation and more rigid regulation).

    Thus, in 30 years time, Canada will have amassed a whopping 1% of its population (age 15+) as millionaires.

    Of course there are some analytical reports which document ‘net worth’ wealth instead of ‘investable assets’. Even these plot million-dollar Canadians at a scant 3% of the current population. Again, applying the same growth rate, in 30 years the number of Canadian net-worth millionaires will have appreciated to 5.5% of the population.

    My questions are:

    i) is it sincere that the financial industry/a financial advisor would ignore a factual and real long-term trend in favour of selling the virtually unattainable $1,000,000 dream?

    ii) isn’t it “a lot of bravado” that the financial industry/a financial advisor would think their skills and products so great as to beat the overwhelming negative long-term odds?

    In 30 years 1-5% of the Canadian population will have $1,000,000 or more (depending to which measure you subscribe).

    I’d wait for a retort on these very much on-topic facts, but I know there won’t be one.

    Please, dear reader, go ahead — ignore the math and buy a mutual fund.

  37. Andrew Spencer on November 16, 2012 at 3:05 pm

    SST…you sure jabber on like you`re the next Warren Buffet…lol

  38. SST on November 16, 2012 at 8:17 pm

    @Andrew Spencer: thanks.

    p.s. — when you (or Ed) can provide any factual and/or mathematical data (instead of immature affronts) to disprove my on-topic critical responses of this article please get back to me. Closing in on 100 comments and you (and the OP) have failed to do as much. Won’t be holding my breath.

    Have a GREAT weekend!

  39. Ed Rempel on November 16, 2012 at 11:19 pm

    Hi Paul T. (#50),

    Picking the mutual fund that will beat the index over the next 15-20 years is not nearly as difficult as it sounds. The trick is that you need to study the fund manager, not the fund.

    I’ve been studying fund managers for years. By analyzing returns and stats, reading everything they write, trying to understand what they do, meeting them to assess personality characteristics, and learning about various investing strategies and how they work, I believe that I can identify them.

    Research supports me, as well. The most in-depth study on the topic was the study on Active Share. It went far beyond just looking at average fund managers and tried to categorized them to try to identify those with real skill.

    This study found that fund managers that were true stock pickers with high Active Share that beat the index tended to continue to beat the index. This is also my experience.

    The problem with most fund managers is the problem of most of the financial industry – being focused on creating something that will sell, instead of focusing on quality and skill. I can weed out most of them very quickly by seeing them focus on marketing instead of the most effective investing.

    If you focus on finding the most skilled fund managers, you can identify them.

    Ed

  40. Paul T on November 19, 2012 at 9:11 am

    @Ed:

    What is the average tenure of a mutual fund manager? Months? Years? Very few stick around for decades. What is the churn rate for MF managers in the Canadian market? Bad MF managers get fired, good ones strike out on their own.

    So lets pick a fund manager. And what happens when that manager leaves said fund company? Do I get back my 2-3 Front End Load charge? Or just charge me again when we flip funds to “follow the all star manager”?

    In any case, I (and certainly seem many others on this site) feel like we’re behind the 8 ball by using Mutual Funds. The fund has to outperform by 2-3% each and every year just to break even with the markets. That’s a pretty big hole to dig yourself out of year in and year out.

    The last thing I’ll say Ed is that I appreciate you coming on here, making a point and defending it. Some people you’ll have a hard time convincing (myself included). We need to see the concrete proof to be convinced.

  41. SST on November 19, 2012 at 8:57 pm

    @PaulT: “Ed…I appreciate you coming on here, making a point and defending it. We need to see the concrete proof to be convinced.”

    Ed has yet to defend his “$1,000,000 Retirement Nest Egg” end-game with “concrete proof”.

    He says this:
    “The problem with most fund managers is the problem of most of the financial industry – being focused on creating something that will sell, instead of focusing on quality and skill.”

    Pre-dated by this:
    i) My point is that financial security comes from having a large portfolio, say $1 million or more.
    ii) Building a nest egg probably means you need to invest in the stock market.
    iii) you should work with one financial planner
    (Ed provides a nice link to his company’s website, just in case you wanted to buy some mutual funds ASAP).

    Add it all together and Ed is just another mutual fund salesman working within the financial industry trying to sell HIS business and HIS investment concept. To believe anything else would be foolish.

    What he has never done with “concrete proof” is refute the factual data reality that 99% of the Canadian population will NEVER accumulate one million dollars in investable assets, let alone do it via the stock market and mutual funds.

    The financial industry is so reliant on long-term data (eg. S&P 500 historical) to hook clients, yet refuses to acknowledge factual long-term trends which nullify its sales pitch (eg. growth of millionaire population).

    Ed is selling a financial industry manufactured and marketed dream.

    He gives undue hype to his “All Star Fund Managers” (a selling point with a catch phrase), and provides this example:
    “One of the fund managers we used to use until he passed away was Peter Cundill. He managed the Cundill Value Fund for 35 years with a return of 12.8%/year vs. the MSCI World index of 10.7%/year.”

    That’s all fine and dandy. What he doesn’t tell you is that for the past 20-years, the same fund has returned 8.2% /year while the S&P 500 (dividends reinvested) has returned 8.5%/year — no manager required.

    Over the past 20 years gold and silver, those most useless and worthless of shiny rocks, have also beat the annual returns of Ed’s selling-point manager. Again, no manager needed to hold precious metals. No need to complicate things.

    That’s TWENTY years of paying “All Star” manager fees to NOT beat the market. A market index and shiny rock out-performed that specific “All Star Fund” for almost 60% of its life. Besides that, the S&P 500 index (dividends reinvested) returned 11.9% annualized over the same 35 year time period as the “All Star Manager” fund.

    Beating the index by less than 1% is not too “All Star”.

    Plenty of holes in what the financial industry and its representatives are pushing to the public. You’ll most likely be retired by the time any “concrete proof” is provided by Ed et al.

    Thanks for playing.

  42. Ed Rempel on November 20, 2012 at 12:52 am

    Hi Paul,

    Thanks for the kind words. I also appreciate the open exchange of ideas.

    To answer your question, I don’t know the average tenure of fund managers, but the ones we are working now have mostly been around for 10-20 years as a fund manager – some longer some shorter. Some are managing the same fund as 10 years ago, some a different fund, and some international fund managers have only had a fund created for them in Canada a few years ago.

    If the fund manager does change funds, it is not a problem. We can either change to follow him or just switch to a different All Star Fund Manager. There is generally no charge to switch to a different fund manager, whether he is with the same fund company or a different one.

    Why would a fund manager have to beat the index “each and every year”, though, Paul? Nothing is that consistent in stock market investing. The index cannot beat my chequing account “each and every year”.

    All a fund manager has to do is beat the index over time after fees.

    I found the study I mentioned in post #48 fascinating. The best investors of all time only beat the index on average 2 years out of 3, but beat the index by wide margins over time.

    As for concrete evidence, as I mentioned, there are compliance and business reasons why I cannot reveal our actual fund managers.

    There are some good and in-depth studies. Google “Active Share” and “Superinvestors of Graham-and-Doddsville”.

    There is logic. In every field, there are people that are significantly superior. I can identify many of the world’s top hockey players. The best football players, as well (Canadian, though, since I’m an Argos fan). If I researched it, I could probably identify top people in most fields. Why would investing be any different?

    Other than that, the most concrete thing you can do is do some research. Find out which fund managers have outperformed their index for the last 5 or 10 years. Look at individual years as well. Start a list of potential top fund managers. Then cross off the “closet indexers”, the ones with strategies that you don’t think will work long term. Research the fund manager and his track record across whatever fund he was the lead manager. Read independent reviews and their writings. Try to meet them. Eventually, you will find a few that you believe have real stock picking skill.

    I should add that hardly any are large cap Canadian. I don’t really consider large cap Canadian to be a core area to invest, since it is almost 80% in just 3 semi-correlated sectors. Our fund managers are in mainly different areas, such as global, US, small cap, or all cap.

    I can tell you that I am very confident in them personally and have 100% of my investments with them.

    I have not owned an individual stock, index or ETF, or any other investment – I have owned nothing but mutual funds and hedge funds managed by the fund managers that I consider to be All Star Fund Managers since I figured out this strategy more than 10 years ago.

    If I thought that buying indexes or picking my own stocks or something else was a better strategy, then I would invest that way and recommend the same thing for our clients.

    Ed

  43. SST on November 20, 2012 at 11:52 am

    “All a fund manager has to do is beat the index over time after fees.

    As for concrete evidence, as I mentioned, there are compliance and business reasons why I cannot reveal our actual fund managers.”

    As for more concrete evidence, factual data shows the S&P 500 (and gold and silver*) beat Ed’s lone revealed fund manager over the last 20 years, and that same manager managed to beat the S&P index by less than 1% over the last 35 years.

    This is the kind of performance that is going to make you “a large portfolio, say $1 million or more”?

    “If I thought that buying indexes or picking my own stocks or something else was a better strategy, then I would invest that way and recommend the same thing for our clients.” — Ed

    “$10,000 invested with [the Cundill Value Fund for 35 years] at the end of 1974 would have grown to $843,392…” — Ed

    One of the Motley Fools showed that buying just five (5) Blue Chip stocks since 1982 resulted in a $1.5 million dollar portfolio ($10,000 initial investment; 30 year term).
    Less time, more money, no manager.
    There goes another theory out the window.

    “The problem with most fund managers is the problem of most of the financial industry – being focused on creating something that will sell, instead of focusing on quality and skill.” — Ed

    “…BUSINESS reasons why I cannot reveal our actual fund managers…since I figured out this STRATEGY more than 10 years ago.” — Ed

    Yup, Ed is no different — he is trying to sell you his product.

    In theory it might work, in reality, however, the facts — no millionaires, let alone stock market millionaires — prove it does not work.

    Ed will never acknowledge these facts because it would negatively affect his strategy sales and business income.

    Capitalism and Free Speech, great stuff!

    *Ever been to Ed’s company website?
    ALL the slogan-accompanying images are of gold and/or silver.
    Why would a financial advisor who despises gold and silver use gold and silver pictures to front his company? Perhaps it’s yet another marketing tool to sell his product, knowing that the general public has an ingrained psychological connection between gold and wealth. If all Ed does is sell mutual funds and insurance, why not display stacks of paper or ticker numbers? Seems more honest, no?

  44. SST on November 21, 2012 at 11:14 am

    @Paul T: “What is the average tenure of a mutual fund manager?”

    Ed: “I don’t know the average tenure of fund managers…”

    ANSWER: “The average tenure of a fund manager was 2.9 years in 2008, down from 4.4 years in 2005” — Financial Post, 02/2011

    I can only imagine it is even less now.

    As for actual fund tenure:
    “Only 42% of the mutual funds that were around in 1990 still exits today. Most were merged into other mutual funds to erase their poor track records.” — Money Sense, 02/2011

    See you at $1,000,000!

  45. SST on November 21, 2012 at 9:25 pm

    A lovely and topical article:
    “Think your investment adviser has a fiduciary duty to you?” — David Baines

    http://www.vancouversun.com/business/Think+your+investment+adviser+fiduciary+duty/7587736/story.html

    **”Securities legislation in Canada imposes a duty on registered advisers and dealers to deal fairly, honestly and in good faith with their client,” the [Canadian Securities Administrators] paper states.

    “We are not aware of any court or regulatory decision that has concluded that this duty creates, or is equivalent to, a fiduciary duty.”

    Advisers are required to ensure that the investment is suitable for the client. However, as the paper notes, that only takes us so far.

    “This does not necessarily mean that the product must be the ‘best’ product for the client,” the paper states.

    That’s because the securities industry – particularly the mutual fund industry – is steeped in self-interest.

    As of Aug. 31, there were 81,835 registered mutual fund salespeople in Canada. Under the terms of their registration, they can only sell mutual funds, not ETFs.”**

    The problem with the financial advisor in the OP is that he is a financial planner — with a deep vested interest in selling mutual funds.

    This financial planner will NEVER tell his clients that amassing $1 million in investable assets is factually near impossible, even more so trying to do it via mutual funds. That would be bad for business; instead he tells them that they will almost positively require more than a million.
    (Hey, someone wins the lottery every week, right? It’s possible!)

    He will, most likely, also NOT try to sell his clients his services and/or products in favour of buying other investments outside of his company, even if it is not “the best” financial product for the client. Again, this would prove detrimental to income streams.
    (Historical data contains reams of proof to show many investments reap larger gains, with similar or less risk, than stocks and mutual funds)

    Every other asset classes and investment avenues (even debt reduction) are disregarded in favour of company income — conscious ignorance.
    All done “fairly, honestly and in good faith”, of course.

    Want a true “All Star” financial advisor?
    Find one with a holistic economic view that has no fiscal ties or undying bias toward one single product.
    (And one who does not willingly ignore blatant facts.)

    Example: I’ve retained the services of the same financial advisor (not my sole advisor) for almost 15 years. About 12+ years ago he advised buying commodities — gold, silver, oil, et al. Now he is advising to buy a specific “sector” of equities (nation, not product).
    I pay him for his advice and he doesn’t try to sell me anything.

    Things change in the world, clinging to one investment form is a guaranteed way to never get that “huge nest egg”.

    Have a good read!

    See you at $1,000,000!

  46. SST on November 25, 2012 at 11:15 am

    @SST: “Want a true “All Star” financial advisor?
    Find one with a holistic economic view that has no fiscal ties or undying bias toward one single product.”

    The following taken from the website of MDJ contributor Brian Poncelet, CFP (http://Www.rightinsurance.ca/about.html):

    “Because Brian is an independent planner, he has no ties to a specific bank or mutual fund company. There is no pressure or incentive for him to sell “in-house” services. This allows him to seek out the best product in the marketplace according to the specific needs of his clients.”

    We need more Brians.

  47. SST on November 25, 2012 at 10:18 pm

    George Soros and John Paulson just upped their gold holdings to 4 and 66 TONS, respectively.

    Yes, that read ‘tons’.

    But what do billionaires know?
    (Except how to make money, that is.)

    I wonder what their mutual fund holdings are?

  48. JJ on November 26, 2012 at 9:52 pm

    @SST

    Do you have a reference for them actually buying gold? All the articles from August 2012 say Paulson has bought gold companies and ETF’s with his hedge fund. These facts may be old but I don’t know where any new facts are. Maybe you can enlighten us?

    “Billionaire John Paulson raised his stake in an exchange-traded fund tracking the price of gold while selling other stocks during the second quarter.

    Paulson & Co. purchased an additional 4.53 million shares of the SPDR Gold Trust, the firm’s largest position, and bought more shares of NovaGold Resources Inc”

    http://www.bloomberg.com/news/2012-08-15/paulson-steps-up-gold-bet-to-44-of-firm-s-equity-assets.html

    “John Paulson, founder of hedge fund Paulson & Co., added shares to all but two of his gold holdings in the fourth quarter. ”

    http://www.forbes.com/sites/gurufocus/2012/02/27/john-paulson-adds-to-all-but-two-gold-company-holdings/

    “According to Bloomberg News, Paulson & Co. and Soros Fund Management bumped up exposure to SPDR Gold Trust to 21.8 million shares and 884,000 shares, respectively. In 2010, Soros called gold “the ultimate bubble” during an appearance on Reuters television. “It may be going higher but it’s certainly not safe and it’s not going to last forever,” he stated.”

    http://gma.yahoo.com/blogs/abc-blogs/billionaires-soros-paulson-bet-big-gold-100033813–abc-news-savings-and-investment.html

    Seems like your example are all the paper products of gold which you despise. None of the articles say how much actual gold nuggets are/if being bought.

    http://getsmarteraboutmoney.ca/tools-and-calculators/interactive-investing-chart/interactive-investing-chart.html

    Historically it looks like gold has outperformed bonds.

  49. Ed Rempel on November 26, 2012 at 11:41 pm

    Hi Paul,

    I understand the concerns you raised. Here is why I am not really concerned about them.

    First, if a fund manager does leave, you can just switch to another All Star Fund Manager for no fee. Switching within a fund company does not trigger a DSC fee. If we have a fund manager leave and want to switch to a fund manager with a different fund company, we just rebate the DSC fee.

    None of our clients have ever paid a DSC fee when we are recommending to switch to a different fund manager.

    Second, you need to understand the typical life of a fund manager to realize that the top fund managers tend to stay with their fund.

    Here is a typical process. Fund managers start out as analysts. They get a CFA degree (certified financial analyst). Their first job is hopefully as an analyst, analyzing a sector as part of a team. Eventually, they may become a respected analyst on their own.

    The top analysts may be given a small fund to manage, or a sector of a larger fund. The top guys may eventually be given their own fund to manage.

    Working as a fund manager that is an employee of someone’s else’s company rarely makes you big bucks, even if you are good. The top fund managers mostly start their own investment company and then get contracts with various mutual fund companies to manage a fund for them. This could be taking over an underperforming fund. Once you have a reputation, a fund company may create a new fund just for you.

    Most top fund managers have their own investment firms. Often, the fund they manage was created by a fund company for them and they have been the sold fund manager since inception. Quite a few are assigned underperforming funds.

    With only the odd exception, hardly any of our fund managers are employees of a bank, insurance company, or mutual fund company. Nearly all own their own investment firm.

    They can still lose a contract and have a fund taken away from them, but this is much less often than you may think. The turnover happens mostly with fund managers that are employees or fund managers that are moving up through the ranks in their career.

    For these reasons, the turnover for the top fund managers tends to be quite a bit less than for other fund managers. It is not a major worry of ours, though, since we can easily move to a new fund manager for no cost, if necessary.

    Ed

  50. SST on November 29, 2012 at 12:48 am

    @JJ: Yup, they are buying ETFs and company stock. Why? Because they are moving up the ladder of greater returns. That is, they (Soros esp.) see things such as mining stocks as extremely undervalued short term, whereas all the easy money in the underlying physical metal has already left the building.

    As I stated, it’s obvious billionaires know how to make money. They are not buying gold etc for the sake of owning gold, they are doing it because they think these gold vehicles will give them the greatest return in terms of dollars — just as Buffet did with silver so many years ago (and then “gifting” it to Barclays — remember them from the LIBOR largest-ever fraud?). Cash is the end-game for these mega-capitalists. It is king, after all.

    Then again, the most important fact which you missed was that both Soros and Paulson are, quite possibly, “authorized participants” of GLD (or very closely linked to APs) and can very easily take delivery of physical gold when they sell their shares. All other “ordinary” investors must accept only cash settlement.

    It’s for this reason (among others) which I stand by my anti-precious metals ETF stance for ordinary investors. Billionaires play by different rules.

    Regarding Soros and his personal history, I wouldn’t put it past him to already be in possession of a big mound of physical gold.

    See you at $1,000,000!

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