Interesting story came my way today. A good friend of mine (the person who bought me the Intelligent Investor last year), and a loyal reader of my blog, got his brother to go out and put some money into RRSPs for the first time. Most likely he has a little bit of cash saved up from working and is saving it up for rainy day. My friend wrote up a suggested portfolio for his brother that went something like this:
- TD Canadian index fund (40%)
- TD US index fund (20%)
- TD international index fund (20%)
- Some TD bond fund (20%)
I’d say this was an excellent suggestion for a starting portfolio. It has a low overall MER and is diversified in terms of equities and bonds, but also diversified across several markets, By keeping the allocation rebalanced and by supplementing it with monthly contributions, you could expect to hold onto this portfolio for a long time and you might just beat a large fraction of the managed mutual funds out there.
But I am getting ahead of myself here. My friend’s brother may have walked into the bank with this suggested portfolio (typed up and printed I might add), but he didn’t walk out with anything resembling it.
The person at TD Canada Trust suggested instead that he invest in a 100% Canadian equity mutual fund because it has done so well in the last few years. My friend’s brother of course went along with it (I would too if I was in his shoes). After all, from the age of 17 to 20 my paltry savings were all invested in AIC Advantage Fund, a Canadian equity fund. Why? Because it had done so well in the previous years. This is probably one of the most common traps people fall into: chasing good performance.
There are so many reasons why the portfolio the TD person suggested (or lack thereof) is just wrong. The fact that this person at the TD Canada Trust branch would ignore the excellent suggestion the client came in with is not too surprising I guess, but it still makes me puke.