Monday, August 13, 2001
When I Grow Up I'm Going to Be a Millionaire: A Children's Guide to Mutual
Should kids buy mutual funds, as Ted Lea advocates? Well, first of all, they can't because, say securities regulators, they have to be 18 years old. But even if they could, should they? No, not necessarily. Say that a lad at the tender age of 5, to whom this dialogue is read, suddenly demands that daddy buy him some units of an average Canadian equity fund. If there is a single contribution of $10,000 and the fund stagnates, which is the best thing one can say of the present market (and the forecast for the immediate future, according to many economists), then, after 13 years of management fees eroding capital at, say, 2.5% per year, our lad will have only 70% of his stake left. And that's if he avoided paying a front sales load.
But maybe he should buy; after all, stock markets don't stagnate forever. Mr. Lea says that mutual funds are safer than individual stocks "because the companies that run the mutual funds have women and men working for them, and all these people do is go around checking out companies to see if they will make money. So they know everything they can about the company....and how healthy the company is."
Now let's have a reality check: Most Canadian equity funds and almost all Canadian bond funds fail to perform as well as their indices.. There is no evidence that active management of the sort Mr. Lea describes pays for itself in narrowly defined asset classes. The advice that mutual funds are less risky than single stocks is true, not because managers who pick stocks know what they are doing, but because funds tend to be diversified. The more diversified, the lower the risk. But short term risk in funds is immense, a point that Mr. Lea does not stress. Perhaps his tyro investors would not like to carry short term losses in pursuit of long term gains.
This is a book that a parent can read to a child as a made up dialogue. With caveats that children are excluded from owning volatile securities for their own good and that managed Canadian equity and bond mutual funds tend not to earn their management fees over periods of 10 to 15 years or more, this book is a modest introduction to investing at a level children can understand.