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I always wondered which was better, Growth versus Monthly Income. Here are my thoughts on it.

Throughout my ten year plus experience and foray into investing, I have always deliberated between opting for growth and opting for monthly income (e.g. cash flow is king).  I remember when I bought Visa (Ticker: V)  a few years ago during its initial IPO at $65 or so.  I remember thinking that I had no idea how well this stock would really do and I was speculating.  I remember selling it for $88 after 2009 correction.  My mother, who also bought it during its initial release, on the other hand, still has Visa and it is doing very very well.

I must confess, I do have a bit of a gambling nature at heart (I used to love buying scratch and win tickets and I get a bit frenzied even when paying at $5 Black Jack tables in the casino) and have, unfortunately, been burned a few times when following or listening to the latest stock tip when talking to friends.  Yes, I’ve bought gold and silver, I’ve bought Suncor (and still have it unfortunately) at its all-time-high, and I’ve bought penny stocks and suffered a huge loss.

I’ve been around the block.

They say the best lessons are the ones you learn yourself and I have certainly learned that dividend and fund investing are the way to go throughout my multiple affairs with the exciting growth stocks.

So when I had to think about what to do with the bit of cash I had sitting in the bank account, I really had to think about it.  On the one hand, I love cash flow (cash flow is what makes my net worth updates look good and look consistent for you guys) but I also love the idea of having growth and having a great success story.

Opting for Growth: The Fast and the Furious

It’s almost like I am deeply attracted to growth investing, its so passionate, so full of excitement, so full of the unknown, and so full of uncertainty.  However, I know that growth investing can be volatile and unstable.  I know that the relationship might not be good for me in the long run, but it might be the best relationship ever.

Opting for Income: Slow and Steady Wins the Race?

And then there’s investments that yield monthly or quarterly income.  These guys (especially if you look at exchange traded funds or low cost mutual funds) are less exciting, more stable, and more secure (for the most part).  They promise to deliver you something consistently.  They promise to give you something on a monthly or quarterly basis.  They might not give you the passion or excitement that you yearn for deep at your core, but they give you a sense of security.

The Verdict?

Of course, even About.com agrees that the perfect dream investment would provide stability and growth simultaneously… however we don’t often live in a perfect world.

Well, the answer, like all things we encounter in life, isn’t black and white.  Just like when you go into a relationship, your preference depends on what your needs are.  Your preferences depend on your core values and what you want, what you stand for, and what you feel comfortable with.

When heading into a relationship and the person you are considering is looking for a fling and you are looking for someone to settle down with, it is just not going to work because you are both not compatible.  You need to look at your time horizon (short term, medium term, long term) and your individual risk tolerance.  If you are an anxious person who doesn’t care to take risks, investing in a risky stock and not sleeping because you stay up worrying about your investment probably isn’t the best idea.  Another thing to think about when considering growth versus income investing, as Retire Happy Blog talks about, is the tax efficiency of your investment.

For me I decided to have my cake and eat it too.  I went mainly for stability and threw in a bit of excitement in there (albeit a very small amount) to keep the excitement that I need.

Readers, what are your preferences?  Are you a growth person or an income person?

Article comments


Using SMA (separately manged accounts). Like portfolios that use 25-30 EFTS around the world you can get a tax deductions on the fees non-registered. Running the fees through a cash account (for RRSPs) again fees can be deducted. Also, though it is not a big deal other international EFTs do not charge HST.

I don’t pretend to be an expert here but how many EFT’s are used in a portfolio of at least $100,000?


fiscally fit says:

Again, this has been one of the best discussions that I have had in quite some time!

fiscally fit says:

@ Kyle

I actually do have some studies showing that it is possible to narrow choices down to select a PM. I have them from an undergrad portfolio mgt class haha. As all studies the interpretation of the results can be inherently bias but the math is solid. If you are interested, Dr. Cornelious Los does some great work with computational finance to remove bias when doing this type of math.

As for embeded comission, National Instrument 31-103 (that is now law) will solve all the issues with transparency and fee disclosure in both the IIROC and MFDA channels. This should weed out the majority of issues we see with “hidden fees”.

And while I do not doubt your knowledge or that you have a pulse on the average persons financial intelligence, I do disagree with some parts. Myself, I do have an undergrad finance degree, as well as a CFP and soon to be completed CFA so I do believe I have at least a fundamental understanding of investments. From the hundreds of financial plans that I have seen and completed, the portfolio analysis I do, and the accountants, DIYers, and average joes I teach about unbiased financial analysis; there are 2 very common issues.

Again, this has been one of the best discussions that I have had in quite some time!
1. Very few people can actually quantify how much risk there are actualy taking on in their portfolios, using any metric.
2. Nobody understands in a $ figure how much they pay. They understand embedded comission, they just don’t understand that their “advisor” gets paid on average 0.33-0.66 of 0.5-1% per annum of their account…. in a dollar value.

Kyle says:

Hey FF,

So I looked up Cornelious Los and I just don’t think the limited focus of the evidence I read stacks up against the massive amount of evidence that Bogle and other passive investing folks have going for them. When you factor in survivorship bias and the real lack of managers who have beat the market for over 10 years, I just do not believe it is possible to choose winners ahead of time. I have to say there is a pretty solid amount of evidence to back this up. *IF* and that’s a huge *IF* there are managers that can beat the market consistently, they almost assuredly exist in small funds that invest almost purely in small-cap and mid-cap companies. Not the ones you mentioned earlier.

You must admit that as a CFP you are a little bias in the whole “does active management make enough of a difference to justify fees” debate right?

I have a good deal of respect for the CFP and CFA designations – I know they are not easy to obtain. Here’s my common sense thoughts on your conclusions:

1) I’m sure that not only is this true, but that most people don’t even understand that basic relationship between risk and return either (making your job very difficult).

2) Now this one I don’t understand at all. You really find that people have an easier time understanding embedded commissions and playing around with percentages for payment as opposed to a simple and straight forward “This will cost x number of dollars”? Wouldn’t it stand to reason that quoting a basic amount for the various things a financial planner will do for you would be by far the easiest thing to understand. Consequently, wouldn’t that help everyone decide if specific aspects of financial planning were worth it for them and create a much more efficient market? It would also take away the obvious bias that exists in advisers recommending the products that control their compensation levels.

fiscally fit says:

Dr Los’ computational finance modeling basically gives methods to come up with analysis that takes out a lot of bias that we inherently put into our analysis. Very good read if you like math haha

Again, Bogle’s thesis is based on portfolio turnover causing reduced returns while an investor is invested. He maintains that investor turnover does not allow for a PM to get the excess return or risk mitigation to occur. This is why he dislikes ETFs. If the person is making the choices about what to invest in themselves (they are PMs by default)then we need to apply the same metrics when comparing the data. And when comparing the filtered PMs to the DIY investor (PM to their portfolio)we as individuals are outperformed the majority of the time. If I ever return to academia, this would be what I do my thesis on.

As far as PMs that consistently create alpha, there are quite a few. Sadly, there are too many “advisors” promoting product that is sub par for too much money. The problem is that the tools for finding these PMs usually cost money.

AS far as the CFP bias, I do believe that if I provide value I should get paid haha but that has nothing to do with investments. A good CFP does not say one type of investing or fee structure is better than another, they are simply different. Given the circumstance, any one of the compensation or fee structure could be the best fit.

1) agreed lol

2) Outside the fact that a financial plan is completely different than an investment plan (although related)these issues are not really worth discussing in this context (as you already know about these things haha)NI 31-103 is already getting the appropriate info to the investors. The compensation based shitty advice issue is eliminated by teaching the investor how to find a legitimate professional if that is the route best suited for them.

I also believe that all compensation methods should exist. IT all comes downs to value being created both inside and out of he investment however the individual defines value. If the reason people use fee only or fee based professionals is because they don’t want “tainted advice”, the issue again is the ability to select a competent professional.

fiscally fit says:

sorry for the delayed response haha

DIY doesn’t mean i don’t use professionals or managed money. It simply means that I have an active involvementor ultimately make the decisions.

The characteristics are similar to every other investment regardless of the asset class. Given a level of risk, I look to get the most return for that level of risk. I then re-evaluate and review and adjust accordingly using a variety of unbiased metrics. As for the funds themselves, I have a set of criteria that I use to filter out the noise and I do some research on the PMs and the research analysts. It is actually quite an easy process. You just need to get past all the noise.

I truly believe that the vast majority all the issues that investors face with investing can simply be eliminated by teaching them how to work with qualified professionals. Fee only, embedded comission, financial advisor vs CFP; these aren’t even issues if people are taught how to seek out and find people to partner with. Once these people are found, they can help people discover what the best fit is for them by giving them all the information to make the best decisions possible.

Kyle says:

We agree on certain basics FF, but I’m afraid we’ll never see eye-to-eye on certain other things. No matter filters you put in, there is simply no scientific evidence (at least none that I’m aware of) that supports the idea that anyone can pick mutual fund managers ahead of time and beat the market.

Also, I like to think I have a pretty good finger on the pulse of the general public and the average level of financial knowledge in Canada at least (or lack thereof) being that I teach high school and see what kids enter the world with (in addition to talking to their parents). The average person will have an extremely difficult time comprehending embedded commissions. There is no legitimate reason for having those in there to begin with. Have compensation stated up front so everyone can easily understand them and then let the free market sort it out.

Working with professionals is fine, but there is a distinct difference between recommending people talk to professionals that can help them, and recommending they get into mutual funds and advanced concepts like corporate class funds.

fiscally fit says:

@ kyle

lol I just hit submit without my info in the fields and it deleted my long post lol it is too late out haha

Anyway, just to reiterate: the MER is the same for corp class and trust style funds for all but a select few funds . The capital tax is also not issue if you are avoiding the small niche fund dealers.

Bogle ideas are based on the idea that PM cannot create enough value through return or risk mitigation to warrant the fees WHILE the average person is invested in a fund. He believes that human nature causes the biggest issue while sideline issues like cost just make it worse. This is why he has an issue with ETFs as they promote active trading. His biggest issue is that people can’t stay the course.

And as we know, behaviour trumps all.. especially math and common sense. The average person, when given the choice between guaranteed to underperform the benchmark (even if by 0.25%/annum) and very likely to underperform…. they will choose the latter most times. And knowing that people will have a more positive result if they simply stay the course (regardless of the investment method) we cannot discount the attractiveness of a managed fund.

I have individual stocks. I have funds. I have made money choosing stocks. My actively managed funds have outperformed index portfolios of a similar risk profile every year. It doesn’t make one better than the other, they are simply different strategies for different situations. The trick is to have the ability to make an unbiased evaluation and to understand DIY doesn’t mean you can’t work with a CFP or a CA or a CFA. It also doesn’t meant you can’t use managed funds. Nothing beats an accountability buddy!

great back and forth. I might have to get you to guest post on one of my DIY blogs 😉

Kyle says:

I hate when comments do that! Sorry you weren’t able to get everything in you wanted to.

We definitely agree that behavior trumps all and “staying the course” is the most fundamental part of investment returns.

I am quite surprised that a DIY investor like yourself would continue to pick actively managed funds though. Obviously you would have no problem staying the course (you plainly understand the negative physchology that sets most people up for failure), so then it follows you must believe that active management really can beat the index in the mutual fund world? Can I ask what sorts of characteristics you look for in a fund? I just can’t get away from the huge amount of statistical evidence that says the vast majority of managed funds will badly trail their index after fees over the long term, and that it is virtually impossible to pick these few winners (1%-ish) ahead of time.

I’m all for working with a fee-only adviser if you need a little bit of a hand (I’ll probably ask for some advice on certain things when my financial situation gets a little more complex).

fiscally fit says:

@ Kyle

OAS clawback and govt subsidies are based off of the grossed up amount for the dividends. You get a credit but the amount is still reduced. I am also not using loopholes, just an understanding of tax.

As for the TClass payout (typically 0-8% based on valuation jan1) 100% of the payout is ROC making it extremely predictable in that regard. You could predict when your income would start to include cap gains (5% would be 20 years). What needs to be clear is the idea that you can choose your “tap rate” and change it as you see fit. The tap rate has nothing to do with the rate of return. You could stabilize your monthly income without selling units/shares. The rate of return is unrelated to this.

I will say though your math is incorrect for the average person in your third paragraph; based on the average tax return I come across. And although I do believe in index investing conceptually, I have yet to come across an index portfolio that stands up better than a “properly” constructed managed portfolio. If you disagree, give me a portfolio to compare against and we can check it out 😉

Overall, it is all about margin of error. Try to maximize your return for a given level or risk, maximize tax efficiency, minimize cost without affecting the previous variables, and accurately assess the opportunity cost of doing these things yourself.

Kyle says:

Interesting FF. Thanks for the TClass update.

Instead of comparing an “index portfolio” how about we start with you providing me with any actual proof that successful mutual funds can be chosen ahead of time? What constitutes “properly constructed” in your mind? I simply do not believe that a managed portfolio will provide enough value to the vast majority of investors to make it worth it. What is the opportunity cost of a DIY index portfolio? Virtually nothing once you have the basics down (maybe 2 hours of reading). On the other hand, having to wrap your head around complex products like corporate class mutual funds and all of their associated niche terminology has a far greater opportunity cost in my mind (hence so many people getting put into ridiculous products by advisors).

While you provided some interesting insights in regards to corporate class funds, you still have yet to convince me that the tax efficiencies make up for the sacrificed investment gains come with high MER fees, and all of the anchors attached to mutual fund management. The long-term math has been proven again and again by guys like John Bogle – mutual fund managers have all the wrong incentives, and as a group simply cannot justify their fees.

It’s easy to say “properly constructed” by reverse-engineering theories. Hard data proves it’s almost impossible for a portfolio of mutual funds to beat a basic indexed portfolio.

Here are a couple of great looks at corporate class funds that have determined my general aversion btw (just so you know I’m not simply pulling this out of no where):

fiscally fit says:

@ Kyle
But Alpha is a measure of performance per unit of risk (std dev) making risk the primary variable that needs to be measured to compare anything. You do need to measure these things though. Even if you are an index investor, YOU are the portfolio manager. If we blast PMs for their underperformance, we need to measure ourselves using some type of adjusted metric otherwise how do we know if we are simply do the same thing? We could make assumptions lol but I prefer fact haha.

We sometimes forget that RRSPs are not really for retirement. They are asimply a tax deferral tool that will act as shelter and provide maximal benefit if income is taken in a lower bracket than when you invested the funds. Corp class would also be a good fit for people in lower tax brackets that recieve lump sums (sold home, inheritance, etc.) in which income wants to be taken while maximaizing gov’t subsidies. For example if you retired and had little to no savings but had a $200,000 home that you no longer could take care of and wanted to move into an assisted living facility. If that were invested and interest or dividend income was taken, the amount the gov’t would help out through subsidies would go down cost you more out of pocket. If you TClassed that out of a corp class fund, it would not be classed as taxable income and subsidies could be maximized. Off of 200k, that would be typically a max of $16000 extra income not including the extra govt subsidies that could be used. If you want or need them. I rough example but you get the point haha

Kyle says:

I see what your saying FF. I agree that most people don’t see RRSPs for what they really are. I know many government workers with solid pensions who are mad at themselves for not using RRSPs in a smarter manner – especially earlier in their careers when their salaries weren’t as high.

I have to admit that I’m obviously not as familiar with corporate class funds as you are in the instance you provided. So I’m being very sincere when I ask for an explanation here (I want to learn something).

In your example the person inherits 200K and is in the lowest tax bracket. I’m not at all sure you’re correct about the person being in a better overall situation using TClass funds. If they put the money in a TSX 60 ETF that is controlled by big dividend players (many of them in the fund you highlighted btw) and left it unregistered, the dividend gross up would work in their favor. I realize they’d be sacrificing some government assistance here, but I don’t think the numbers fall in your favor very often. The thing with Tclass is that you don’t necessarily know what your return on capital numbers will be and if the returns are stable for the long term or not (see this article for more details). Obviously in that situation a TFSA for the first part of the income would make the most sense. I’ve crunched the numbers a few different ways and the margins are way too close for me to consider the high MER of the corporate class funds (the one you chose to highlight was amongst the lowest MER I’ve ever seen for that class), the complete lack of faith I have that these funds will outperform over time (statistically it is far more likely they will severely underperform), and finally when you base a strategy like this on current taxation loopholes there is no guarantee that loophole will continue – especially when it doesn’t make a lot of logical sense from a market perspective from what I can see.

There are reasons that much smarter people than myself have said, “Don’t pick your investments based on taxes, pick them based on investment fundamentals.”

Phil says:

So when we were young 20+ and starting out I looked to NL Mutuals at the top end to fulfill our needs. We had little time to spare searching for winners, so spending a little time searching for a fund that had a growth and income balance at the time. we picked Bissett Canadian Equity and PH&N Dividend Income funds at the time (back in 1997 and 1999…) Today we still hold both (~25K initially). Over time we timed our additions to regular PAC adds and today both have grown nicely and continue to deliver the goods as far as relatively stable returns, with low MER’s (~500K combined now a growing organically :)). Neither of us are adding to these now as we, let me rephrase I have found the magic of growth stocks. Now that we have a base with our stable mutuals, I spend spare time identifying growth-momentum stocks. CSU-T, BAD-T, MDA-T, CMI-T, MCR-T, RKN-T, AYA-T, WAN-T to name a few. What my research has found is that for every 5 stocks I pick I only need 1 to outperform to do well (30-50%+)… Anyways back to the question – we are both, but at first we put the priority on stability, and now that we have that stable base, we can afford the added risk of identifying growth momentum stocks, which is a much more dynamic venture. So in summary for us, stability at the expense of growth was traded for simplicity early on, but as experience and comfort with market volatility has been gained (maturity as investors with markets like 2007/2008) we feel we can afford more risk for more reward. – Cheers, and remember in the end you need to be able to sleep at night.

Lee @ The Value Geek says:

Right now for me, I see trying to pick stocks as futile. Why should I think that I am a lot smarter than my fellow man. I think the efficient market hypothesis does a pretty good job at explaining things. There are some emotions that go into it and people speculate too much hurting or helping the true price of a stock too much, but why spend all the time and emotions trying to figure it out. Buy when things are maybe cheap or a good price, but not when you think people are too excited about stocks. Then hold them forever taking their dividends and enjoying their growth.

Kyle says:

Aka “The Warren Buffett Approach”?

fiscally fit says:

Corporate class funds are always interesting to look at as well. Especially when paired with a T-Class payout (when you want to start taking income). Trust structure funds have some great benefits but corp class adds some great deferral. For growth this is great. Trust structure might be best for income. Either way there are a few options available that allow you to take advantage of both strategies, or at least the benefits of both.

Kyle says:

I don’t think the fees associated with corporate class funds are ever worth the payout FF. Here’s a good article TM wrote on it: https://youngandthrifty.ca/corporate-class-funds-ill-pass/

Fiscally fit says:

@ Kyle
I just read the article and as usual it is well written. But there are some incorrect points (or just outdated). And just for clarification, I do not like or dislike corp class funds, they are simply tools for investors. The fees are typically the exact same as a trust structure. The big difference is in a non reg account and tax deferral. I do have some differing viewpoints about planning investments with tax efficiency and registered investments, and they differ from TM haha but corp class is a great solution for some and not so great for others haha. But i do believe in providing real world examples instead just pontificating for the sake of it so here is an example of an off the shelf corp class fund http://pdf.globefund.com/servlet/FundProfile/EN/html/cif?mode=HTML&fund_id=56431&tf=Financial/FundProfile/html/en/pages/ci/ci_mutfund_corp&universe=CI_FUNDS&branding=cif&product_id=

Kyle says:

So this fund you cherry picked FF, here is how I look at it. It has a MER fee of 1.6% which I hate to see in any of my investments, and it’s 5 yr returns are brutal. Granted I don’t often look at merely 5 yr returns, and the 10 yr returns do stack up a little better, buy still, the stock picking aspect of these corporate class funds, combined with their large MER fees, make the likelihood they will perform well enough to justify the tax deferral very small in my eyes. In some cases, where all registered accounts are maxed out, they might be worth a look, but at that point, I say why not just copy their extremely broad-based portfolio and buy the individual equities yourself? There is nothing in their holdings I can see that would be considered a insightful growth stock, they’re just basically closet-indexing the Canadian and American markets.

Fiscally Fit says:

great discussion
I understand what you are trying to say but you are missing some fundamental parts. Even if they did mirror the index they are able to do so with considerably less risk (if we define risk using measurements like beta and standard deviation, etc). You also have to remember that any MER is ok as long as you receive the appropriate excess return or risk mitigation. The issue is that this is not always the case. Just like most long term investors “staying the course” haha behaviour trumps all lol I also have yet to see a stock picker actually measure his/her risk in their portfolio using virtually any quantifiable metric making any actual comparison virtually impossible. I am a firm believer in DIY investing, I just think that most people can’t even identify how much risk they can truly take on and get the best return for that level or risk due to the fact that they don’t measure it using any metric.

But back to corp class haha. The main advantage (for some people) would be that you could grow your portfolio tax deferred, retire, and TClass a distribution out of the corp class fund. This would create an income that would not affect govt subsidies, oas clawback, or drive up marginal tax rate. Regardless of how the income is earned inside the fund, cap gains is the only thing you would eventually have to worry about. This is more efficient than receiving dividends or having to sell units for a distribution.

Again, this is just one method for people to accumulate and disperse funds efficiently. It is not good or bad, it is simply a good fit for some.

Kyle says:

I agree that discussions like this are valuable for both myself and other readers.

I’ve never really understood why anyone more than a few years away from retirement should care at all about Beta and/or Standard Deviation to be honest. Alpha is the only thing that ultimately matters to your returns, who really cares if there is some volatility in the mean time?

The interesting thing here is that it seems that we agree that stock picking is a fruitless endeavor for the vast majority of people. So how do we get from that premise to the idea that these fund managers of the specific one that you picked can outperform their index (by more than their MER as you pointed out) by picking large cap stocks and bonds, managing a large amount of money (a drag on the positions that can be taken), and being strapped by the rules of the mutual fund industry in regards to sector diversity, cash positions etc. There is simply no data to support that this mutual fund, or any others will outperform their index enough to justify the fundamental structure of the investment.

You do raise an interesting point I hadn’t considered about the clawback of government subsidies, that would be an interesting add-in when it came to individual portfolios. Basically on incomes over 90-100K or so in retirement, there might be some situations where top-performing corp classes might make sense, but given the lack of evidence that these funds can be identified ahead of time I’m still not sure I could ever recommend that path to anyone.