DIY investors are selling themselves short by relying solely on ETFs, according to a money manager.
Christopher Dewdney, principal/CFP at Dewdney & Co, said passive index-trackers can complement a portfolio but going it alone with a 100% beta product means you have already resigned yourself to underperform.
He said: “ETFs mimic the market, and if you are going to mimic a market and you’re going to charge a fee – even though the fee is low, 30 basis points - you’ve guaranteed yourself 100% to underperformed, bottom line.
“When I sit down with a client and we do an analysis and create a portfolio, that portfolio is tied to a goal and within that portfolio we have a target. My goal is to outperform and a lot of times we do. If we isolate a period, maybe we’ll underperform but for the long-term trajectory, our goal is to outperform.
“So why would you sell yourself short and right off the bat say ‘I don’t want to outperform, I actually want to get a return less than what the market is commanding for whatever sector or strategy that ETF is employing’.”
Dewdney says investors need human intervention and that having an advisor overlooking the portfolio and strategy is the right message to get out.
And he believes the current environment encapsulates the need for preparing for all eventualities, including both a continuation of this epic bull run as well as a potential major correction.
He said: “[After 2008] everything is out of the window. Everything is new – previous benchmarks have been broken, previous protocol has been thrown out the window and the world is evolving. Yes, you should research the past but importantly we have to look to the future and that’s our strategy.”
Dewdney said much of the noise from the top leaders is that the markets have been great, retirement plans are great and everyone should be thankful. The Toronto-based advisor urges caution, however. He said a market correction would not be a bad thing and believes it’s actually needed.
He said: “I tell my clients, we are taking a lot of profits off the table. We’re staying fully invested but we’re just changing the allocation a bit in our portfolios because that day is going to come and we don’t want to be fully exposed on the downside.
“The smart markets should feel a bit of fear and should take an air of caution because real money is made not in this period; it’s made in the trough – buy low, sell high.
“I’m not predicting the market but what I am saying, based on the data that we’re seeing, is that we’ve had quite the run. Can the market run higher? Absolutely, but in the meantime, we’re pulling some profit off the table and just changing the allocation a bit on the portfolio as we see things materialize in the market.”
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