A (pretty boring) Mutual Fund Beat A House?

Last month RBC sent out a chart documenting how their Canadian Dividend mutual fund (a basket of Canadian blue chip stocks) has outperformed the Canadian real estate market over the past 20 years. It is an interesting anecdote which will surprise most, especially here in the blissed out Vancouver real estate market.

I’m not here to cheerlead for stocks beating real estate – it’s entirely plausible that real estate ‘wins’ over the next 20 years. What is interesting is how at odds peoples’ return assumptions are compared with what actually occurred, and how this disconnect surfaces often in all sorts of financial decisions people make.

What struck me:

1. The media’s role. The financial media has frequently viewed mutual funds with general disdain + ongoing shots of fee hysteria. Scrutiny is warranted and some fund companies do have indefensible fees. However, the repeated negative narrative can become accepted as broad reality by the average investor…which then leads to misinformed financial decisions….which often lead to life-changing, crappy financial results that were avoidable all along.
2.  Cheap and easy can still be good. Intuitively it is reasonable to assume the “cheap and easy” fund should have lagged behind its larger, less diversified, real estate counterpart. After all, the fund investment simply requires walking into a bank branch or financial advisor’s office, or logging onto an online discount brokerage. Real estate investments, on the other hand, require extensive research, successful negotiation and acquiring financing. In theory the market should compensate you with higher returns, not less, for taking on real estate’s additional constraints and stresses.
3.  Behavior…damnit. Despite the impressive investment result, skittish investor behavior undoubtedly assured that most RBC Dividend fund investors did not actually experience the 20 year documented return. Per Dalbar’s research, the average holding period of a mutual fund does not extend beyond 4 years for most investors, let alone 20. In my mind, the well-documented fact that mutual fund investors’ actual returns typically lag mutual fund returns, is a pretty big deal which deserves as much, or more, media attention as fees.

Mutual fund fee reductions improve investor results. Disciplined investor behavior helps even more. The two combined is hopefully the direction more investors are headed in today. The fund industry is insanely competitive and is maturing daily due to massive fee pressure. This is all to the benefit of the individual investor who could now embark on a 20-year investment journey with funds whose characteristics and pricing make them even more attractive than the RBC example.

Armed with fee reductions and (hopefully) increasing doses of real information, the stage is set for more people to enjoy positive investment experiences. So long as investment reality and awareness remain at the forefront, investor behavior and corresponding results, stand to improve.