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Canada Pension Plan Poor Results are a Valuable Investing Lesson

Canada Pension Plan Poor Results are a Valuable Investing Lesson

June 29, 2024

CPP disappointing investment results can help investors understand how to invest, writes Peter Watson.

We have learned a valuable lesson on how to invest.

Do not overcomplicate your investment process, keep it simple. And manage all investment costs, meaning do not overpay.

This conclusion can be seen by looking at the Canada Pension Plan Investments 2024 Annual Report. Part of your paycheque goes to CPP and during retirement you will receive a small annual pension.

CPP, like all investors, has two options. Invest in an extremely well diversified portfolio so in effect you are not just buying specific stocks, you are effectively buying entire markets throughout the world.

Alternatively, you can be an active manager and pick what sectors to invest in and then more specifically which stocks within that sector. The hope is that you will outperform the general market.

CPP is a very active manager. It has a large team of highly paid intelligent people. Investments it makes are managed by highly paid intelligent people. All that sounds good.

Except there is an endless amount of research, history of investment returns and poor investing outcomes from millions of investors that prove this does not work.

To be fair, active management can have positive results in the short-term because of chance but because successful active management is so unpredictable and unreliable many of us in the industry consider that to be because of luck as opposed to skill.

The CPP annual report outlines in detail how the huge sum of money is managed. On page 39 it reports that since 2006 when active management was introduced, the fund return is just slightly less than if the funds had been invested in a low-cost passive management strategy.

My suggestion is simple. Overspending on high cost actively managed investments should be avoided.

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