Originally published November 17, 2021
I decided this would be a good post to share my thoughts about professional wealth management. I often get a lot of questions about this. But first, a bit about my underperforming portfolio.
My Portfolio Continues to Underperform
The portfolio continues to underperform, gyrating back and forth but getting a little worse. After a review of my strategy, it appears that for the most part, I have the big picture correct. I overweighted energy and financials, which both are the number 1 and 2 performers year to date. So why am I still underperforming? The problem does not lie in this part of the strategy, but in the de-risking of my information technology sector component. If you recall I underweighted the tech sector and paired down high flyers like Shopify and Kinaxis, replacing them with unloved positions like Verizon and Intel. It’s a good strategy if you expect the risky information technology sector to crater, however until now, this sector continues to do relatively well. My undersized and unloved version of the sector within my portfolio did much worse as a result. The unfortunate reality is that the information technology sector along with its cousin, the communication sector, represent almost 40% of the SP500 market.
So why does that matter? The market has such a large proportion in the information technology sector that the game is mostly won and lost by getting that one sector right either by weight or by having the right stock picks, of which I have neither. Is my approach safer? Yes, but it comes at a cost.
Am I ok with this? Sort of. There is no way around it. If you want to de-risk, you have to expect to underperform for a while. I identified this possibility early on and it is exactly how it played out. My return is actually good for the amount of risk I have and this is why not all returns are the same, even when they are identical.
The Case for Professional Wealth Management
This part is where I awkwardly try to tie in Wealth Management Fees.
Why I Use a Wealth Manager
Marc why do you pay a wealth manager x% per year and underperform the market? Don’t you usually beat the market with your own hobby portfolio? Great but annoying questions!
As many of you know, the majority of my retirement fund (85%) is managed through TD Wealth. I often get slack from my investor friends for paying an annual management fee to TD. Particularly when the returns in my hobby portfolio almost always exceed my TD Wealth Management returns. Why don’t I just manage the whole thing?
The reason I do this is that TD Wealth provides a slightly less than market like return with a much more solid (read boring) portfolio. The idea here is that the TD portfolio would be more resilient in any market decline. Being retired with no other income, I require a financially sustainable path to my death in 2072. Basically, I have chosen the higher-quality portfolio that TD Wealth provides with a slightly lower return. It’s a trade-off, just like de-risking the hobby portfolio.
It’s a similar approach for those who hold Warren Buffet’s Berkshire Hathaway. Berkshire has underperformed for almost a decade, but when you look deeper, the return for risk is really good. No one will end up having to eat cat food if you are invested in BRK.B. Could Warren, TD Wealth and I all over-perform in the future? Yes, but the market temperament has to change first. Right now, the market values high-growth stocks with a higher risk profile. The day when value-style stocks flourish will come, but it may take a while.
Could I manage a similarly lower-risk portfolio and save the management fee? Yes, I could, but it would be boring, and I would not be as good at it. I would also not manage the entire amount the same way that I manage the hobby portfolio. Once it becomes serious and important to my life, it loses the fun hobby aspect. Would I trade options? No sir, that’s my future that I am messing with. Would I build strategies that overweight sectors as I do now? Hmmm, maybe not as much. Unlike most people, I do not work and cannot make up for mistakes with time and a paycheck. Once in the retirement zone, you certainly have to be more conservative. That’s why I have a hobby portfolio to play with, which is independent of my wealth account.
The other benefits I get from the TD Wealth Management account are:
- tax strategies (I suck at those).
- no dumb mistakes, such as my GME option fiasco, holding too much cash, or emotional buying and selling.
- no monthly portfolio decisions (selling stocks every month to cover my retirement expenses.
- no dividend income forecasting – they do that for me.
- future projection modeling.
Wealth Management is a personal choice. I’m retired and prefer to spend my time doing other, more fun things than managing my retirement account every month.
A few other important things to keep in mind:
- The portfolio management fee is tax deductible for non-registered accounts, so the fee is actually under 1% for me.
- Wealth management is also more affordable the more money you have under management. Fees range from .75 to 2% annually depending on your institution.
- It cost money to be in the market, even if you are doing all the work yourself. There are trade fees, admin fees, ETF fees, mutual fund fees, and tax withholding fees, some of which can exceed 1% annually.
Other Reasons to Consider Professional Wealth Management
If you chronically underperform the market, then Wealth Management is totally worth it. The difference in performance usually makes up for the fees and then some.
Quick note: Wealth managers are just like mechanics, some are good, and many are not. Best to be choosy, as performance will vary.
Alternatives to Wealth Management
Holding a couple of key market ETFs could provide a better return if you’re ok with the associated market risk.
If your return expectations are really low, i.e. you want dependable low-risk returns by having half your portfolio in fixed income and the remainder in dividend stocks, then you simply are paying too much for that low safe return. If your trying to achieve 4% and now you pay a 1.5% management fee, that is expensive! A Wealth Manager, in this case, is barely working and still collecting a fee. You need more performance (and risk) to make it efficient.
Final Thoughts on Wealth Management
In the end, there are many ways to skin a cat, and investing is a personal endeavour that really needs to be done with consideration of your individual needs. I know what works for me, but everyone is different with different risk tolerance, and return expectations. The situation I see too often is small investors who underperform the market by quite a bit with high-risk portfolios but cannot accept the idea of paying a fee for something they already do. So you underperform by 5% but save a 1% management fee. Are you really ahead?
Happy investing.
Marc’s Monthly Moves
If you got this far down, apologies, this got wordy. On a lighter note, my recent picks like Cameco and Krane shares ETF have both taken off with 45% and 25% returns respectively….in just a few short months. As noted above, I have increased my position in Krane shares as there seems to be growing interest in the carbon credit market.
| Buy | Sell |
| KraneShares Global Carbon Strategy ETF (KRBN), more |
Marc’s Portfolio YTD Performance
- Portfolio return 18% (Including currency losses/gains)
- Portfolio return 19.5% (without currency losses/gains)
- SP 500 return 25%
- TSX return 25%
The portfolio underperformed against the SP500 by -5.5 points.
Money with Marc 