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Jan 2, 2024

Lessons on Index Investing–Part 2 Investors Of All Ages–But Especially Young Investors–Should Consider Utilizing Index Investing In Order To Reach Long-Term Financial Goals

by Fred J Masters

In Part 1, you'll recall reading about how my senior financial accounting students honed their financial analysis skills by participating in a stock market simulation where they managed two long-term investment accounts. One of the accounts was actively managed (stocks were selected), and one was passively managed (limited to index products which track a given stock market index). Student reflections provided insights into the inherent advantages associated with utilizing index investing. 

Let's wrap up this series by digging deeper into index investing to better understand its effectiveness.

It All Starts With Diversification

For long-term financial goals such as funding retirement, we know we have to both save and invest. It's instructive to study how pension funds invest since their managers are responsible for funding financial obligations that are literally decades down the road. Canada Pension Plan Investments, which manages $570B worth of net Canada Pension Plan (CPP) assets, routinely uses diversification.1 Management notes that "Diversification is our most powerful lever for ensuring the long-term resilience of our portfolio and is our main tool for managing overall risk."2

Unfortunately, we personally struggle when it comes to diversifying our portfolios. For example, we allocate over 50% of our equity portfolios to Canadian equities despite our country accounting for only three percent of the planet's equity markets.3 Therefore, we miss out on proper exposure to sectors such as tech and healthcare, which are more prominently featured in foreign markets.

As pension plans know, diversification is a key determinant of success when it comes to mitigating investment risk. Individual investors should be diversifying their holdings properly, but we aren't there yet. Index investing provides material help here.

You Don't Want To Overpay For Underperformance

Investing in global companies via the stock market has been an effective wealth accumulation strategy. For example, the S&P 500 Index (the major U.S. index) has recorded a compounded annual gain of 9.9% (including dividends) dating back to the mid-1960s.4

You would think that actively-managed mutual funds (with their well-paid managers) would beat index results. However, research indicates that 85% of actively-managed Canadian equity funds have underperformed Canada's major index over the last decade.5  With a longer timeframe, the results are more telling; 93% of all large-cap managed funds underperformed the S&P 500 Index in the U.S., dating back fifteen years.6

Keeping investment costs low is crucial. While U.S. mutual funds get a "top" ranking in terms of being investor-friendly from a fees and expenses perspective, mutual funds found in Canada come in "below average".

Canadians overpay for underperformance when it comes to our mutual funds. This dramatically eats away at a portfolio's valuation. Fortunately, index investing provides an effective alternative from both a fee and performance perspective.

Getting The Asset Mix Right Matters

Successful long-term investors get the asset mix right. Typically, dollars are allocated to three components—equities, bonds, and cash—in individual long-term investment portfolios. For young investors saving for retirement, the saving window is decades-long, so these investors can take on the risk of market volatility knowing that stock markets have historically performed well over the long term.

When considering an asset mix for a long-term investment goal such as retirement, a good starting point is to take 100% and then subtract your age to arrive at an equity weighting. For a 30-year-old, that means a portfolio with a 70% equity weighting. This young investor won't need to withdraw dollars for decades, so the exposure to stocks can be high. It might even be reasonable to substitute 110% or 120% for 100% in the above formula, given longer anticipated life expectancy.

Your risk tolerance is important, too. If you feel that you will not be able to cope when stock markets inevitably crash, then you need to dial back the equity weighting. This will likely mean lower returns; it may take longer to reach your financial goals.

Here's How to Index

When it comes to reaching long-term investing goals, we know that diversification is critical. We know, too, that giving dollars to actively-managed mutual funds to invest on our behalf will likely result in overpaying for underperformance. Utilizing an index investing strategy with an appropriate asset mix, given both our age and risk tolerance, is a prudent path forward, and it can be pursued in a variety of ways.


All robo-advisors offer global balanced index investment portfolios with equity weightings that typically range from 20% up to 100%. Advisors are available for guidance. You can "autosave" by investing dollars on a regular basis; this can be done inside or outside of tax-sheltered accounts. Automatic rebalancing is used: if an asset mix component rises too much, the excess will be sold, and the dollars reallocated to other components. Account minimums are small (or don't exist), and fees (measured by percentage of assets) drop as your portfolio increases. Look for annual fees to fall within the 0.25% to 0.70% range on accounts below $100,000.

Index Mutual Funds

Although large financial institutions offer these, they are not heavily promoted. Many of the same advantages exist as with using a robo-advisor. Investment advice will not be provided if funds are held in a self-directed account. You can choose from several index portfolios or create your own by selecting individual index funds (such as Canadian Equity, International Equity, etc.). Minimum required dollar investments tend to be small, especially with regular contributions. If you select your own index funds as opposed to going with a portfolio, the rebalancing decisions will be yours. Fees, as expressed by the management expense ratio (MER), can be in the 0.25% range for individual index funds and approximately 0.75% for index portfolios.

Asset Allocation Exchange-Traded Funds (ETFs)

These are ETFs that are similar to robo-advisor offerings but are listed on the stock market. As such, a brokerage account is required, and a commission fee will be charged to make each purchase (and sale), although many providers now offer access to ETFs on a commission-free basis. Component rebalancing is automated. Expect to find MERs under 0.20%.

Individual Index ETFs

You can construct your own index portfolio by selecting individual ETF products. The product line-up choices have broadened as index investing has become mainstream. You can select both broadly-based index funds or specialized index products such as sector funds, socially-responsible funds, and leveraged funds that will magnify gains (and losses). Given the fierce competition, MERs for ETFs that track major indices are around 0.05%, while more exotic choices have MERs above 0.70%.

The Best of the Best Know that Index Investing is the Way to Go

Embracing index investing in the pursuit of long-term financial goals is wise. It eliminates the need to pick stocks, and this avoids trying to hit investing "home runs". Warren Buffett, one of the world's greatest investors, has directed the trustee who will oversee his wife's portfolio to invest 90% of the fortune in a low-cost S&P 500 index fund and 10% in government bonds. He notes that "I believe the trust's long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers."  

Your future self just might thank you for following a similar path.

Fred J. Masters, BBA, BEd, PQP, is the author of Lessons on Mastering Money: The Personal Finance Guide for Canadians in their 20s & 30s. He is the President of Masters Money Management Inc. and has given financial wellness presentations to all demographics in Canada, including university students and alumni. He is a retired professional educator, having taught senior financial accounting for decades. He is also a licensed mortgage agent with Mortgage InGenuity Inc. and can be reached at To find out more, visit


1      CPP Investments, F2023 Annual Report, page 1


3      "Canadians reducing home bias, eh?", page 1, Connect with Vanguard, Vanguard Investments Canada Inc., July 2023 (

4      Berkshire Hathaway Inc., 2022 Annual Report, page 2



7      Kennaway, G., Pettit, A., Möttölä, M., Wolfstetter, N., Chan, W., Johnson, B., Dutt, M., Choy, J., Garcia Zarate, J., "Global Investor Experience Study: Fees and Expenses", Morningstar, 30 March 2022, page 9 (

8      Berkshire Hathaway Inc., 2013 Annual Report, page 20


This work contains the author's opinions and ideas as related to the subject matter. The content is by no means designed to provide any reader with individual financial advice. Note that past performance is not a guarantee of future results when it comes to any specific investment or investment strategy. Always consult a competent financial professional for advice when it comes to making financial decisions. No guarantee is made with respect to the accuracy or completeness of the content.