To help you navigate the new age of dashing discretion, we’ve found a number of smart ways to turn the downturn on its head. Whether you’re looking to cash in on a softening real estate market, find surprising savings in your own kitchen, or cut the interest rate on your credit card, we’ve got good news for you. Despite what you may think, you can control your destiny. Because even in bad times — make that especially in bad times — there are plenty of good deals to be had.

Just before Christmas, Young decided to seek help — not from a doctor, but from a hypnotist. Now, she says, “nothing negative affects me.”

Hypnosis has long been used to help people quit smoking or lose weight. But lately more of us are seeking treatment to deal with anxiety over the recession, according to the U.S.-based National Guild of Hypnotists (NGH). “People are saying ‘I’ve worked for so many years, and now I’ve lost so much money in the stock market. What’s going to happen?’ ” says Debbie Papadakis, a Toronto hypnotist and president of the guild’s Ontario chapter.

Hypnotists say they’re able to help by tapping into a client’s subconscious. They encourage hypnotized subjects to recall happier events from the past and suppress fears by picturing ourselves enjoying those same blissful moments in the future. “You’re basically changing the tapes in your head,” says Dave Large, a hypnotist on Vancouver Island.

Hypnotists try to “lock” good feelings into the subconscious permanently. One way they do that is through post-hypnotic suggestion. A person who has trouble saving money, for instance, will be told that each time their phone rings, it’s a reminder to deposit $100 in a savings account every Friday.

It sounds kind of kooky but Young and other people who’ve gone through hypnosis swear by it. “I’m way more upbeat,” she says. Still, Young has a hard time explaining why. The best she comes up with is bad thoughts don’t seem to nag at her anymore.

Despite its association with stage magicians and the like, hypnosis is a bona fide field of medicine that goes back to the early 1800s when a Scottish surgeon named James Braid found he could put people into a trance by having them stare at a shiny object like a swinging pocket watch. These days it’s rare to find a doctor who uses hypnosis, but a U.S. medical study two years ago found that breast cancer patients hypnotized before surgery recovermuch faster and have fewer painful side effects.

What is it like to be hypnotized? To find out, I make an appointment with Donald Currie, a Toronto hypnotist who has been practicing for eight years. Currie used to work in an investment brokerage but gave it up after he was hypnotized. “It worked for me, so I decided this is something I wanted to do myself.”

The first thing Currie tells me is that almost everyone who’s hypnotized remembers the experience. The second is that hypnotists cannot control a person. “If you were under hypnosis and the fire alarm rang, you’d get up and walk out of the building, just like everyone else. You’re in full control.” He adds that one out of every nine people cannot be hypnotized.

Currie’s office doesn’t look hypnotic. The walls are green and the window shades are open, so it’s bright. But a scented candle and new-age music in the background sets a tranquil mood. He invites me to sit in a comfortable chair facing a wall.

Currie tells me to focus on any point on the wall. No hypnotist, it seems, uses a swinging watch any more. “In a few minutes,” he says after a while, “I’m going to start counting to 20, and sometime, maybe at 15 seconds, maybe at 10, you’ll close your eyes.” I don’t make it that far. By the time he counts one, my eyes are shut. For the next 30 minutes or so Currie talks to me, and I respond with nods and one- and two-word answers.

He’s right about hypnosis not being a form of mind control. I’m aware of everything. But I’m also so relaxed, I don’t want to move. When Currie finally tells me to open my eyes, I feel remarkably refreshed, and this feeling stays with me for several days — though, like Young, I’m not sure why I feel so good.

People who seek treatment are usually hypnotized more than once. Most clients require three to six visits, no matter whether they’re trying to quit that two-pack-a-day habit or hoping to forget how badly their stock portfolio has been decimated. A course of treatment is not cheap. Hypnotists charge anywhere from $75 to $200 per hour and each visit lasts an hour and a half to two hours. The cost isn’t covered by government health insurance or most private plans.

Finding a good hypnotist can be tricky sinceanyone can open up a practice. You should make sure that any hypnotist you use has completed a minimum of 100 to 150 hours of classroom training through an association such as the NGH or the Canadian Association of Hypnotherapy. Ask, too, if a hypnotist has taken more intensive training courses. Generally, a hypnotist is able to charge more depending on their level of education and experience. Dwight Damon, NGH president, says the best way to find a good hypnotist is to talk to previous clients, then chat to the hypnotist about what you can expect. “If you feel comfortable talking to this person on the phone, you’ll probably have a good experience.”

If you’re an old school mourner, you might regard such gestures as being in questionable taste. But they appear to be early indicators of a genuinely different approach to saying goodbye to loved ones. While Canadians are still spending much the same amount on funerals as we always have — $5,000 to $15,000 is typical — we’re no longer devoting so much of that cash to buying a top-end casket. “We’re spending more on the event itself,” says Robin Heppell, a funeral consultant in Victoria. Funerals have become “more about celebrating a person’s life,” says Tim Thompson at Mount Royal Cemetery in Montreal. Among Thompson’s favorite farewells was one for a woman known for baking delicious blueberry muffins. As each person left her funeral they were handed a fresh blueberry muffin. Then there was a service for an elderly man with a crooked pinkie finger who used to tell his grandchildren how, years ago, an elephant had stepped on it and broken it. The story wasn’t true but became so well known that when the man died, the family brought an elephant to his funeral in Montreal from an Ontario zoo 500 km away.

A growing trend is the video tribute — basically a photo collage of the dead person’s life, accompanied by his or her favorite songs. It’s usually played during the visitation and costs around $300 to $400.

Another option is to hire a celebrant — a professional funeral organizer who specializes in personalizing funeral services held outside a church. Most celebrants charge around $300. “I’ve had people come up to me and say ‘I hate to say this, but that was a really good funeral,’” says Sandra Bell-Buttars, a celebrant in Cobourg, Ont. A few years ago she organized a funeral for a woman whose family worked in the trucking industry. She loved trucks, so her cremated remains were placed in an urn and driven off in the front seat of a big rig after the service.

Yet another trend is the “green burial.” No embalming fluid, no concrete vault, no manicured lawns. Instead of a headstone, mourners plant a tree or shrub over your grave, which eventually reverts to a forest. The first green cemetery in Canada opened inside Royal Oak Burial Park in Victoria last fall. Already, five people have been buried there and six more have reserved space, says a cemetery executive. Proving that even if you’re dead, it’s never too late to make the world a better place.

Here are the basics: Anyone over 18 can invest up to $5,000 a year in a TFSA. You can put your money into a savings account, GIC, stocks, bonds or mutual funds. No, you don’t get a tax break for contributing money, as you do with an RRSP, but your money grows tax free inside the TFSA—and, unlike an RRSP, when you withdraw your money, you don’t pay a penny of tax. This can have very nice effects. If you contribute $200 a month to a TFSA for 20 years at an average annual return of 5.5%, you’ll amass $11,045 more than you would in a taxable account. That makes for one fat piggy bank.

Unfortunately, TFSAs have their pitfalls. How do you avoid them? Just follow our TFSA do’s and don’ts:

Do use TFSAs for fixed income investments. David Stewart, a financial adviser at Stewart & Kett in Toronto, recommends using your TFSA primarily for GICs or bonds since the interest you earn on these investments would ordinarily be heavily taxed. It makes less sense to hold equities in a TFSA since capital gains on stocks already enjoy tax advantages. So do dividendsfrom Canadian companies.

Don’t ignore fees. Some brokerage firms are charging hefty fees to manage TFSAs, so it pays to shop around. At BMO Nesbitt Burns and BMO InvestorLine, you’ll pay a $50 annual administration fee as well as withdrawal fees that range from $15 to $25. In contrast, most banks charge no fees if you put your TFSA money into a savings account or GIC. You can find other no-fee deals at E-Trade Canada, TD Mutual Funds and ING Direct.

Don’t treat your TFSA as a rainy-day fund. The big payoff from a TFSA comes in the long run, after your investments have doubled and tripled in value. At that point, a TFSA can save you thousands of dollars a year in tax. On the other hand, if you dip into your TFSA account every few years to buy a car or repair the leaky roof, you blow the benefits. A TFSA “will simply not shelter much of your money from taxes if you use them as an emergency account,” says Gordon Pape, author of Tax-Free Savings Accounts:A Guide to TFSAs and How They Can Make You Rich. Assume you’ve invested $5,000 in a TFSA savings account at 3%. If you take the money out in two years to buy a car, your tax savings add up to, at most, $96. A better way to get that kind of return: just skip that daily coffee at Tim Hortons for a couple of months.

Junk bonds are issued by firms with shaky credit —the ones that have to pay extra to convince investors to lend them money. These bonds aren’t officially labelled as “junk,” of course. They’re more politely known as high-yield bonds.

As you can see from the accompanying graph, high-yield bonds now pay north of 18% a year. The yields have shot up in recent months as a sickening economy has increased worries that marginal firms may start defaulting on their bonds. To compensate for the extra risk, investors are demanding higher and higher yields.

The current yields look very tempting indeed. During the last two recessions the default rate for these bonds peaked near 12%, which suggests that at their current prices, highyield bonds offer a healthy margin of safety even in a nasty recession.

If you’re intrigued about the potential of this market, forget about buying individual bonds. The risk is high that you’ll guess wrong and pick a dud. Instead, buy a diversified selection of bonds. The iShares iBoxx $ High Yield Corporate Bond (HYG) is an exchange-traded fund that trades on the New York Stock Exchange. It gives you exposure to a wide range of high-yield bonds and charges only 0.5% per year in fees. If you prefer to rely on a manager’s expertise, Chou Bond fund is a good pick even if its management expense ratio is 1.34% per year. Just remember, high-yield bonds aren’t for the faint of heart and most people should only put a small fraction of their portfolio into them.

Okay, I’m dreaming, of course. Even if my investments dropped to next to zero, I doubt my adviser would have called.

Garth Rustand isn’t surprised. Rustand, who lives in Nanaimo, B.C., used to be an investment adviser. He says most advisers are really salespeople. Their job is to sell you mutual funds so their firm can collect fees. If you’re looking to them as sources of investing wisdom, think again.

Most advisers possess no greater insight into the market than you or I do. A 2007 study by Daniel Bergstresser and Peter Tufano of Harvard and John Chalmers of the University of Oregon compared the performance of adviser-sold broad equity funds to funds that investors selected themselves. Between 1996 and 2004, the adviser-sold funds returned 6.1% a year. The funds picked by do-it-yourselfers actually did slightly better, at 6.5%.

Why don’t advisers perform better? Rustand, who now teaches people how to invest through a group called Investors-AidCo-operative of Canada, says advisers suffer from conflicts of interest. For instance, advisers typically earn twice as big a commission for selling their own company’s proprietary mutual funds as they do for selling funds from outside the company. This gives advisers a nearly irresistible urge to put you into their company’s proprietary funds, even if those funds are not particularly good.

Advisers also have selfish reasons to put you into funds that charge high fees and therefore pay the adviser more. A typical fee on an actively managed equity fund is 2.5%. But paying high fees doesn’t result in improved performance for you. Just the opposite, in fact.

You can check the numbers for yourself by looking at the SPIVA Scorecard (www2.standardandpoors.com). SPIVA, which stands for Standard & Poor’s Indices Versus Active Funds, compares the performance of actively managed equity funds with their benchmark indexes. Over the last year only 23% of actively managed Canadian equity funds were able to outperform the S&P/TSX composite index. Over the last five years only 7% did. The overwheling majority of investors would have been better off buying low-cost index funds that track the market index for minimal fees.

That’s not to say all advice you get from an adviser is bad. It’s just that you should ask yourself how the person across the desk is making his money. If he’s being paid through commissions and trailer fees from mutual funds, be skeptical. Think about ways to get more objective advice.

You may want to manage your own investments. Constructing a great portfolio is much simpler than you realize. MoneySense’s own Couch Potato strategy takes about 15 minutes a year. To learn more, visit www.moneysense.ca or read How I Became a Couch Potato on page 30.

Some issues do require an expert’s touch. It makes sense to visit a pro for advice on highly technical issues such as tax, insurance or estate planning. The trick is to make sure that the person across the desk has no hidden agenda. My advice? Use a fee-only planner, preferably one who charges by the hour. This type of planner is rare in Canada (you can see a list at moneysense.ca), but I’m convinced that they are the wave of the future. By billing by the hour—the same as a lawyer or an accountant—these planners can focus solely on offering you good advice, with no thought about selling you products.

Why don’t more of us use fee-only planners? It’s the shock of seeing a bill for $500 to $1,000, says David Stewart, a fee-only planner at Stewart & Kett in Toronto. We’re so conditioned to the notion that financial advice should be free that we faint at the notion of paying upfront for it. What we don’t realize is that we’re already paying traditional advisers for the supposedly free advice that they deliver. We pay for their advice in the form of hidden fees and skewed recommendations. An hourly paid adviser is free of those conflicts. The best news of all? If an hourly paid adviser doesn’t call you, at least you’re not paying him for the privilege of being ignored.

Used properly, annuities have a remarkable ability to help you safely increase your retirement cash flow. They allow you to boost the withdrawals from your nest egg by 25% or more without exposing you to any added risk, according to respected researchers such as David Babbel, professor of finance at the Wharton School, and Moshe Milevsky, professor of finance at York University’s Schulich School of Business, and author of Are You a Stock or a Bond?

Annuities are based on the simple notion that by pooling resources we can reduce the financial risks of old age. One major risk is longevity risk—the surprisingly strong chance that you or your spouse will live an exceptionally long life and thereby run out of money. If you’re both 65 now, chances are more than one in five that at least one of you will still be drawing breath at 95. With traditional investments, you need to throttle down your withdrawals from savings in case you’re one of the lucky few to live exceptionally long. But with annuities, insurance companies average or “pool” individual risks together. This allows the insurers to provide more generous payouts. The long-lasting payouts to a few Methuselahs are offset by the briefer payouts to the many who die younger.

Annuities can make a big difference to your retirement standard of living. Consider a 65-year-old retiree. If he invests only in stocks and fixed income, he can safely withdraw only 4% to 5% from his portfolio each year (with annual inflation adjustments) if he wants to be reasonably sure that he will not run out of money. Life annuities let him increase those payouts substantially because they provide him with the assurance that at least one part of his portfolio will never run dry.

Milevsky says you get the greatest benefit from gradually adding annuities to your investment mix from your late 60s to your late 70s, until you have about one-third of your portfolio in annuities. In the early years, this strategy allows you to boost your safe withdrawal rate from under 5% to somewhere between 5% and 7% (again, with annual inflation adjustments). If you have a moderate-sized $400,000 nest egg, that can add at least $4,000 a year to your standard of living. By the time you reach your mid-70s, you can expect to add an additional 1.5 to 2.5 percentage points to the safe withdrawal rate, Milevsky says. Using a different research approach, Babbel says the potential increased payoff from annuities is 25% to 40% over what you could achieve with a traditional stock and bond portfolio of equivalent risk.

Annuities are most likely to benefit you if you’re a typical middle-class retiree. “[An annuity] is really something that doesn’t make a lot of sense in the extremes, but in the middle it’s very important,” says Milevsky. “Warren Buffett or Bill Gates doesn’t need an annuity. On the other hand, [an annuity] is not going to help the individual that just hasn’t saved enough.” Annuities also don’t make as much sense if you already have an ample company pension plan (since you’re already well covered); if you’re unlikely to live a long life (the payoff comes from living to a ripe old age); or if your priority is leaving money to your heirs (annuity payouts are curtailed by death).

If annuities make sense for you, Milevsky advocates diversifying your portfolio among annuities, traditional mutual funds and insurance products. Each category of investment has different strengths. By your late 70s you should aim to have about one-third of your portfolio invested in each category, he says.

Another approach suggested by the Canadian insurance broker Jim Otar (retirementoptimizer.com) is to use annuities to cover your basic living needs. With essentials covered you can invest the rest however you choose.

Whatever annuity you choose, make sure its payouts are guaranteed for life rather than just a limited term. You buy annuities from an insurance company through an adviser who is licensed to sell insurance products. If it looks like annuities might fit your needs and your adviser isn’t qualified to advise you about them, think about getting an adviser who is. The following are three types of annuities to consider, with current payout rates provided in the accompanying table.

Fixed annuities: These work like a traditional company pension. They pay you a fixed monthly amount for life. By doing so, they provide excellent protection against longevity risk and the risk of a stock market crash. Their only weakness is that their payouts are not adjusted for inflation, so the purchasing power of your payments will dwindle with time.

Many insurers sell fixed annuities and you typically get the best payout rates by buying at an older age. Couples should consider getting “second to die” joint life annuities to ensure good coverage for the longer-living spouse. Consider having the first five or 10 years of payouts guaranteed even if you die—that ensures a minimum return if you die early. But be warned that once you’ve purchased a fixed annuity, your money is committed. You have no account balance to tap into in an emergency.

Indexed annuities: These products are like fixed annuities, but have an added advantage—their payouts are adjusted annually (“indexed” in other words) to cover inflation. The catch is that to compensate for the cost of inflation protection, the initial payout rate on indexed annuities is much lower than for fixed annuities.

In theory, indexed annuities are ideal, because they provide all-in-one protection against the three big risks of retirement: longevity risk, the risk of a market crash, and inflation risk. But despite their theoretical advantages, indexed annuities haven’t caught on in the marketplace. Some experts say you’re better off protecting your portfolio from inflation in indirect ways—for instance, by also holding investments such as stocks, which tend to rise in value with inflation. Other experts say the inflation protection provided by indexed annuities is well worth the cost. “You cut the cheque to the insurance company and then for the rest of your life you don’t have to worry about anything,” says Otar. “You get lifelong income indexed to inflation—no market risk, no longevity risk, no inflation risk.”

Variable annuities: Variable annuities offering a guaranteed minimum withdrawal benefit (GMWB) for life are marketed under such names as Manulife’s IncomePlus and Sun Life’s Elite Plus. They feature a guaranteed payout and the possibility of sharing in stock market gains.

These complex products demand a bit of study. Typically, they guarantee that you canwithdraw 5% per year with no inflation adjustment. This is usually lower than fixed annuity payouts. But they sweeten the deal by also providing “upside” potential for sharing in stock market gains. They accomplish this by embedding a mutual fund within the product and promising to “reset” to a higher guaranteed withdrawal rate if the embedded mutual fund increases in value over a specific three-year period (after deducting withdrawals and fees, of course). You can choose to defer withdrawals—every year you do so increases subsequent annual payouts by 5%. You can even get some or all of your remaining funds out in an emergency, although you must pay redemption fees to do so.

Consumers appear to like the flexible features and GMWB products are very popular. But critics point to the relatively high total fees—about 3.5% a year—that these products charge. They also don’t like the low guaranteed payout rate of these products compared to fixed annuities. Finally, skeptics such as Otar caution that your chances of getting a reset are low. For you to enjoy a reset, the embedded fund would have to rise at least 25% in a specific three-year period to compensate for the drag from withdrawals and fees.

One more thing. When you buy an annuity from an insurance company, you are relying on that insurer to be able to make payments to you for several decades. How do you know if the insurance company will still be around in 30 years? Malcolm Hamilton, an actuary and worldwide partner with Mercer Human Resources Consulting, says the risk of an insurer being unable to pay is limited—but the means of protecting yourself from that risk is also limited. Buying your annuities from a large, well-established, well-capitalized insurance company with a good credit rating helps to increase your safety, he says. So does keeping your annuity purchases within levels guaranteed by the industry-sponsored guarantor, Assuris. It guarantees non-GMWB annuity payments for up to $2,000 a month or 85%, whichever is larger. In the case of fixed-term GMWB products, Assuris protects the guaranteed balance amount up to $60,000 or 85%, whichever is larger. Assuris is also considering what protection it might offer on the GMWB periodic payouts.

But this past spring, I finally scored a genuinely lucrative benefit. In fact, it’s one that may well turn out to be worth a couple of hundred thousand dollars. While working on the MoneySense Seven-Day Financial Makeover (see the October 2008 issue), I became a convert to index investing and moved all of my savings — including my RRSP and my children’s RESPs — into what MoneySense calls Couch Potato portfolios.

If you’re a regular reader of this magazine, you’re familiar with the Couch Potato strategy. It consists of investing in three to five low-cost index mutual funds or exchange-traded funds (ETFs). These index funds get their name because they’re designed to passively track — or index — major stock and bond markets. By keeping costs low and diversifying widely, you earn higher returns than investors who look for hot stocks and market-beating mutual funds.

I have been writing for MoneySense since 1999, so I’ve been hearing about the supposed superiority of Couch Potato investing for a long time. And yet, for reasons I’m about to explain, I was slow to embrace the notion of index investing — or passive investing, as it’s sometimes called, to distinguish it from funds that “actively” try to beat the market. Instead, I kept sending a few hundred bucks a month to a series of financial advisers, who used it to construct a portfolio of half a dozen actively managed mutual funds. I paid an annual fee to the investment firm, plus a less visible management fee of about 2.5% on the funds themselves. In other words, I did the same thing that tens of thousands of other Canadian investors do every month.

That changed during the Seven-Day Financial Makeover. I was supposed to be there as a reporter, but I ended up getting a makeover of my own. Not that it was an overnight, road-to-Damascus conversion: even after a week of listening to the experts crow about indexing, I was still skeptical and wanted to know more. I spent weeks reading about the theory and practice of indexing, studying the math and logic behind it. In the end, my initial reluctance evaporated and I’ve embraced index investing with an evangelical zeal.

Let’s take a walk through the common objections to index investing — the same ones that prevented me from realizing its merits for so many years.

If indexing is so great, why isn’t everyone doing it?

We’re taught to believe that if something sounds too good to be true, it probably is. That’s usually great advice, especially in investing, where get-rich-quick schemes are inevitably scams.

But indexing is not a get-rich-quick scheme. It doesn’t promise anything magical. I used to raise an eyebrow at the claim that simple, cheap index funds could beat the vast majority of professional money managers. It sounded like an extraordinary boast — as though someone were selling a golf strategy that could beat most players on the PGA Tour. The difference, however, is that pro golfers routinely shoot under par, while most money managers fail at precisely what they’re paid to do, which is beat the market.

It’s not their fault: blame it on simple arithmetic. There are thousands of money managers out there and most of them are well trained and hard working. But you don’t need a PhD in math to know that the average manager, by definition, can’t beat the market average. Managers aren’t dumber than the market, they are the market. Expecting most of them to produce above-average results is a contradiction in terms — like expecting most kids in a school to have above-average grades.

Even if you are lucky enough to have your money with an above-average manager, that’s not the whole story. Money managers deduct hefty fees before they pass profits on to you. So while about half might beat the market average before fees, very few do so after subtracting their cut. That’s why simply buying the index — which guarantees you the market averages, minus tiny fees — consistently produces better results than most active managers.

The proof is in the numbers. Over any medium or long period, index investing wins. During the five years ending last September, about 89% of actively managed U.S. large cap funds lagged behind the S&P 500. In Canada, active investors did even worse. An astonishing 93% of Canadian equity funds failed to keep up with the S&P/TSX composite index. To make matters even more discouraging for active investors, the tiny fraction of funds that do better than the index each year are constantly changing. No one consistently finishes ahead of the pack.

So why doesn’t everyone index? I think it’s human nature. Just because a strategy is simple and proven to work doesn’t mean that people will adopt it. We all know a simple, proven way to lose weight: eat less and exercise more. Yet every year, we spend billions on useless weight loss products.

My mutual funds charge only 2.5% a year in fees. That’s not much considering that my money is being managed by highly skilled professionals.

Few things in life are free. We don’t expect our electrician to work for nothing, so it makes perfect sense to pay 2.5% to the professionals who manage our life savings, right?

I used to think so. But now I understand that these fees, when compounded over years, can cost you tens of thousands — even hundreds of thousands — of dollars.

First off, it’s important to note that indexing, while far cheaper than active investing, is not free. Because the holdings in an index fund are determined by passively tracking a benchmark, a computer makes the big decisions. Since computers don’t drive BMWs, index funds typically charge just 0.5% or less in management fees, compared with the 2.5% that many mutual funds charge.

What effect does a measly two percentage points have? The stark reality hit me square in the face during the Seven-Day Financial Makeover, when one of the experts showed us a graph that illustrated the difference between a portfolio with a net return of 7% a year and a portfolio with a net return of 5% because of fees.

In the former case, where you’re getting the full 7% return, $2,500 invested annually for 35 years will swell to more than $345,000. But at 5%, your nest egg would grow to less than $226,000. That’s right: a 2% fee can cost you almost a third of your potential gains. The low-fee investor in this example will wind up with enough extra money to quit work five-and-a-half years earlier than the high-fee investor. Make no mistake: fees make an enormous difference.

Paying tens of thousands in fees would be one thing if you were getting value for that money. But that value is there only in special cases. I think it makes perfect sense to hire a financial planner (preferably a fee-only one) if you have zero investment knowledge and are just getting started. Ditto if you’re prone to impetuous financial decisions and need someone to restrain you, or if you require highly technical advice about estate planning or insurance.

But if you’re paying someone simply to choose stocks or mutual funds for you — as I did for more than a decade — you are paying a huge amount of money for something you can do yourself with minimal effort simply by buying an index fund. Hiring a financial adviser to pick stocks or funds is like hiring an electrician to screw in a light bulb — and then paying him extra fees, year after year, for the light it produces.

My investment adviser has beat the market three years in a row, even after fees. She obviously knows what she’s doing.

Actually, she’s just lucky. I know this is tough to hear. Your investment adviser has certificates hanging in her office, testifying to her training. She sounds smart when she talks about giving you exposure to this market and that sector. But as one financial author puts it, “Wall Street’s favorite scam is pretending that luck is skill.”

Here’s a beautiful illustration of the point. Assume you’re tossing coins, and if you flip heads, you earn $1,000, while flipping tails means you lose $1,000. When 10,000 people engage in this little exercise, an average of 5,000 of them will be winners after one toss. After two flips, 2,500 will have flipped heads both times. After 10 flips, about 10 of our flippers will be enjoying an incredible winning streak purely by chance. Things work the same way in investing. Purely by chance, many managers and advisers will put together long streaks of beating the market. That is no guarantee the streak will continue.

If you are an index investor, you are guaranteed to never beat the market after fees. Why choose an investment strategy that will forever produce mediocre returns?

It is true that an index fund cannot beat the market it’s tracking. It must, by design, produce average market returns. And once you subtract the small fee, your net return drops slightly below the market average. If you have an index fund that tracks the S&P 500 and carries a 0.5% fee, you are guaranteed to trail the market by half a percentage point every year.

That sounds ugly until you consider the alternative. With an actively managed fund that carries a management fee of 2.5%, you would have to beat the market by an average of 2% every year to match the performance of the index fund after costs. Some years you may accomplish that. But over the long term, the feat is extremely unlikely, and the vast majority of funds fail to do so.

When people argue that index funds are doomed to deliver below-average returns, they are playing games with what “average” refers to. In this case, it refers to the overall market average, not the average return of comparable mutual funds. As we’ve seen, most active funds produce returns that are below market averages. So while it’s true that index funds will produce returns that are a hair below the market average, they will still do better than the average actively managed fund.

If you are considering buying an index fund that tracks the S&P 500, compare its long-term performance to actively managed funds that invest in U.S. large cap stocks. Over any significant time period, the index fund will beat the majority of these funds. In many cases the index fund will rank in the top 25%. In other words, there is nothing “average” or “mediocre” about index funds when compared with the alternatives.

My investment adviser is a friend. I know it’s silly but I feel bad about firing her.

OK, you like your adviser personally. She’s a neighbor, and your kids go to school together. I hear you. But that doesn’t mean you should pay thousands of dollars for services you don’t need. I have a friend who’s a plumber, but I don’t hire him to flush the toilet for me.

If you have a stockbroker, tell him the coin-flipping story before you fire him. Just don’t expect him to have a revelation about the power of randomness. As Upton Sinclair wrote: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

Index investing is fundamentally conservative. I want to invest aggressively, so it doesn’t make sense for me.

There is nothing fundamentally conservative about index investing. Whether you are a 65-year-old retiree who wants to preserve capital or a 21-year-old who’s willing to take on big risks, the power of indexing works equally well.

This is because the key factor that determines the risk level of your portfolio is not the individual securities that you buy. Far more important is asset allocation: the relative mix of stocks and bonds. A middle-aged investor who plans to retire in 25 years might reasonably choose a portfolio of 60% stocks, 40% bonds. A younger person might do better with 70% stocks and fewer bonds, while a retiree will sleep much easier with a portfolio of 70% or even 80% bonds.

You can easily achieve any of these asset allocations using index funds. An investor with a 25-year horizon might build a portfolio with index funds tracking U.S. stocks (20%), Canadianstocks (20%), international stocks (20%) and the Canadian bond market (40%). Using these same four funds, a different investor can easily turn this portfolio into a fiendishly aggressive or sleepily conservative one, simply by changing the weighting. Want more risk? Put just 25% in the bond fund and add another 5% to each of the equity funds. Need more security? Do the opposite.

There is a perverse myth that index investing is an unsophisticated, one-size-fits-all strategy that is unsuited to people who really understand finance. This is a lie. Index investing is endorsed by the world’s top economists and finance professors, many with Nobel Prizes on their mantels, and all of whom know more math than your broker. Institutional investors, such as endowment funds and pension funds, also embrace indexing. These funds have billions of dollars in assets and could afford to hire the best active managers in the world, but they choose not to. By now you understand why.

OK, Mr. Potato Head, how did you make out during the crash of 2008?

I switched to an index strategy last August, and by late December I was down 20% overall, including losing a third of my equity positions. I went from Couch Potato to mashed potato. But these losses had nothing to do with flaws in the indexing strategy. I would have done just as badly or worse with my active investments — and paid someone a fee for losing my money.

Almost all investors lose money when markets fall, and that includes Couch Potatoes. But over the course of a bear market, the average investor in actively managed funds will do worse than the indexer. Want proof? During the bear market of August 2000 to December 2002, only 39% of active Canadian equity funds outperformed the S&P/TSX composite index, and only 29% of U.S. equity funds did better than the S&P 500. Couch Potatoes still lost money, but they lost less. No one knows how long the current bear market will last, but when it’s over, it’s likely that indexers who stayed the course will be better off.

You will often hear people say that indexing works only in bull markets. These people argue that when times are tough — and they are downright brutal now — you need an active manager to protect you by ditching your worst performers and then reinvesting when the markets pick up.

The best response to this line of argument is to note that active managers can protect you only if they guess right. To do so, they have tomove into cash before the market hits bottom, and then reinvest when it’s on its way back up. The problem with this is that active managers have no way of knowing where the bottom of the market is, nor when stocks will head back up. So to succeed, they need to guess right twice: first when they sell; again when they buy. For the record, your probability of being right on two coin flips is one in four — the same as your chances of being wrong both times. The commissions are the same either way.

Indexing is not a magic formula. It doesn’t guarantee you anything except a fair share of market returns — which sometimes means loss — for a very low cost. If that doesn’t sound like a fair deal, ask your financial adviser whether she can promise you the same.