Trevor Abes: Writer

Tag: index funds

February 9, 2021

Young Canadian Investor #28 — Why Stocks Go Up and Down

If you look up your favorite stock’s price on TMX and continually refresh the page, you’ll probably notice that the price fluctuates moment to moment and wonder why. Well, what it comes down to are buyers and sellers, the former looking for the cheapest price per share possible, the latter looking for the most expensive, according to their views on what the business underlying the stock is worth.

Bullish, as opposed to bearish. See below.

What happens is that a random buyer’s price coincides with a random seller’s price, triggering a transaction. They happen to hold similar views on the value of the underlying business so they’re able to do business with each other. What one investor is willing to pay is what the other is willing to receive. Now, if their agreed-upon price is a few cents higher than what the stock last traded at, you may notice a jump in price when you refresh the page, especially if a considerable number of shares changes hands. The same goes if the agreed-upon price is lower, possibly leading to a cheaper price on the next refresh.

Moment to moment stock price fluctuations also reflect the decisions of thousands of buyers and sellers acting on their financial needs. Having a view on a what a company is worth and how much you should pay for its stock will help you make a more informed investment, but if you need the money to pay hospital bills, you’re going to sell no matter what. Same goes for car repairs, a house extension because more babies are coming, or taking a trip somewhere to decompress if you really need to chill.

Longer term, though, and we’re talking decades, stocks go up —i.e. have a positive expected return on your money—because they reflect the value successful businesses create for their customers. A profitable track record is generally reflected in a higher stock price, and vice versa.

One nice thing here is that, while businesses are founded and folded every week, economies as a whole tend to grow over time, meaning the successful businesses outweigh the losers overall. So if you invest in a portfolio of stocks meant to represent every economy across the globe—at least those with public stock markets—you can partake in their growth and make yourself some money.

You can achieve this by investing in a diversified portfolio of index funds that own every publicly available stock in the world, or at the very least a representative sample. Have a look at my short guide to investing for young Canadians for step-by-step instructions. I’m also available to teach you 1-on-1 over Zoom if you prefer.

The hardest thing about investing is wrapping your head around the terminology. Even if it’s not with my help, don’t shy away from educating yourself and facilitating the fulfillment of your financial goals.

To end, it’s important to point out that there’s no way to know for sure why a stock moves up or down in the short term. There’s no electric sign somewhere announcing that Suncor stock dropped because investors are bearish, as opposed to bullish (see above), on the price of oil, or Canadian Tire stock rose thanks to consumers growing increasingly comfortable with doing their home improvement shopping in packed stores. All financial analysts ever have are educated predictions based on available information.

The only thing we know for sure is that the better a company is at making money and funding its own profitable growth, the better the chance that its stock will soar and make its shareholders wealthy.

Feel free to drop your questions in the comments!

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

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January 30, 2021

Young Canadian Investor #25 — Why You Can and Should Invest on Your Own

As you’ve learned over the last 24 articles, there’s a lot to absorb before you can invest your money comfortably and confidently into the world’s stock and bond markets. You need to make decisions about which financial goals to pursue, for example, as well as how long you have to save before those goals can hopefully be met. That means taking a stand about how your future’s gonna look a few decades down the line and committing to it, even though you’ll likely be slapped around by life enough to periodically reconsider your priorities.

Then there’s the whole technical side of things where you get a grasp on what stocks, bonds, and index funds are, and how the different investment accounts on offer may or may not suit your situation.

It adds up and I get how the overwhelm can start to creep in. That’s why I understand if, after all this reading, you’re still feeling hesitant about opening your account and investing. Even though you know how fortunate we are as Canadians to have access to TFSAs and RRSPs, and you can see the benefits of saving money that’ll grow on its own over time, such as fulfilling dreams of all sizes, it’s still somehow not as easy as just doing it.

To that end, I came up with a list of aspects of the investing process that might cause newbies to give up or lose confidence + my own two cents as to possible solutions.

  1. The mechanics of inputting buy and sell orders for your investment funds is not everyday knowledge. You need to type numbers in that represent real money and you don’t want to make a costly mistake. That’s a normal feeling. Thankfully, portfolio manager Justin Bender has got you covered with his instructional videos on that exact subject. He has videos for pretty much every major brokerage in Canada and you’ll benefit from his approachable explanatory style.
  2. It can be a tall order to demystify how the stock market actually works. All those stock tickers, performance metrics, and constantly changing prices can be hard to crack. You should always seek out educational help tailored to how you learn. If you absorb knowledge more efficiently by reading, you can take a look at my investing guide for young Canadians. If you’re more of a visual learner, this TED video might help to fill in some gaps.
  3. Another scary part of tackling the craft of investing on your own is not having an expert check over your work and give you the go-ahead. If you can’t seem to get past this barrier and take the plunge, set up an appointment with a financial advisor in person to open your account when covid allows and have them run you through the investing process. If you’re a customer with their bank, it’s their job to help you. Just be wary of any sales pitches and stick to your plan, whether that’s engaging in active investing or setting up your portfolio of diversified index funds.

Forever is quite the stretch and the prospect of having to tend to your investments on your own for that long can seem daunting. But I know you can do it. You know why? Because you’re taking time out of your day to read an article about investing. That means you’re already part of the chosen few who are capable of investing for themselves. You wouldn’t be here otherwise. So long as you take your time and give yourself room to learn, you will prevail.

As always, if you have any questions at all, fell free to drop them in the comments.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

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January 23, 2021

Young Canadian Investor #23 — Common Investing Mistakes

Just like the practitioners of any other discipline, investors have to deal with a set of common mistakes the avoidance of which separates the average from the exemplar. You don’t need specialized knowledge to avoid them, just the ability to keep your emotions in check and the willingness to read a book or two to learn how stock markets work. Being a successful investor is within anybody’s grasp. Let’s discuss why by exploring some of those common mistakes below.

  1. First thing most investors fail to consider is the appropriateness of the fees they pay. If you’re invested in funds that charge you 1-2% of whatever money you have invested every year, are the funds’ portfolio managers earning you enough money to justify those fees? Seeing as owning the global stock market through index funds has historically made you about 5% per year after inflation on average, that means a 2% fee fund needs to earn you about 9% per year, supposing 2% inflation, just to keep up.
  2. With so much praise showered on Buffett, Lynch, Templeton, and other legendary investors, too many people believe in the promise of stock-picking expertise. Truth is, though, these individuals are outliers, and research-based stock picking is just as much an art as it is a science. Over the long-term, the vast majority of practitioners will underperform those who simply buy the entire global stock market through a diversified portfolio of index funds.
  3. Unless you know what you’re walking into, it’s very easy to let your emotions get the best of you as a new investor. On any given year a stock fund can fluctuate in price, sometimes by half or more, on its way to making you money over 10 or 15 years. Investing is a long-term practice, one where businesses need to be allowed to innovate, grow, and create lasting value; to be successful, you just need to live your life and stay out of their way. That means ignoring your urge to sell an investment simply because other investors are overreacting and causing its price to drop, even though the quality of the business hasn’t changed.
  4. Many young investors think you need lots of money to participate in the world’s stock and bond markets. Thankfully, this is no longer true. Wealthsimple, for example, allows you to open an RRSP or TFSA and buy as little as one share of the investment fund of your choice without having to pay a commission. If you have a spare $50, you can start investing today.
  5. It’s a widely-held misconception that investing in the stock market is basically gambling. You can definitely use stocks to gamble by, say, buying some shares in a company your coworker gave you a tip on, or a company that makes products you’re deeply familiar with even though its business prospects may not be all that bright. Whenever you invest hastily, you’re taking a flyer and could lose money. And you already read numeral 2. If you take a more measured approach, though, and invest prudently through index funds, which offer you a long-term positive expected return—5% per year or so after inflation—you’re golden.
  6. The key to investing is staying invested long enough so that compound interest can work its magic. That means you need to buy more shares of your stock and bond funds at every paycheck over a handful of decades for satisfactory results to show. Making the rash decision to give up on funds after a few short years is always a mistake.
  7. You may also be thinking that all this investing stuff is too complicated for you to handle it yourself, meaning you need to resort to a financial advisor to put your money to work. Not the case at all, if you ask me. As someone who put the reading in, learned about which investment accounts to open, and has been building his investment portfolio over the last two years, I can tell you with absolute certainty that you are more than capable of doing the same.

If you’re interested in a short and digestible investing guide to get you going, consider my new book, Nine Steps to Successful Investing: A Guide for Young Canadians. I designed it to cut through how financial literacy is one of the most boring things you can learn. You’ll get nothing but the essentials, expressed in plain language, with extra resources only if you’re interested in learning more. Whatever you decide, don’t hold off on building your nest egg. Your future self will love you dearly for it.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Feel free to drop any questions in the comments!

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

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January 16, 2021

Young Canadian Investor #21 — What It Costs To Invest

While investing is an essential part of being financially responsible, it’s important to know that it isn’t something you can do for free. There are costs associated with acquiring and owning stocks and bonds to save for your future, so you might as well learn about them now instead of being startled by them on a monthly statement years down the line. Let’s get going.

First off, anyone who buys or sells shares of stock has to pay a commission to the brokerage house facilitating the transaction. Usually that’s between $5-$10—if you do business with Questrade or one of the big banks—but Wealthsimple recently became the first financial institution in Canada to let you trade stocks for free.

If you own shares of a mutual fund or ETF that owns numerous stocks, bonds, or both, you’re going to pay something called a Management Expense Ratio (MER). The MER includes the salaries of investment professionals in charge of overseeing the fund, as well as any associated legal and administrative costs. What you’re charged is a percentage of the money you have invested on a yearly basis. Ex: suppose your fund’s MER is 0.5% per year. That means 0.5% of your investment will be taken by the fund to keep the lights on, usually calculated daily and withdrawn monthly from your balance.

Funds will also charge you a Trading Expense Ratio (TER), which is simply the amount of brokerage commissions the fund incurs to implement its investment strategy. The more stocks and bonds the strategy dictates that they buy and sell, the higher the TER will be.

If your fund engages in active management, that means its portfolio managers try to pick what they consider to be the stocks and bonds with the highest potential return. This tends to entail a hefty research budget to figure out what investment to pick, as well as a higher TER that reflects the buying and selling of these investments as they fall in and out of the research results. In Canada, an active fund will generally cost you 1%-2% of your investment per year all things considered.

If your fund engages in passive management, that means its portfolio managers don’t go to the trouble of trying to make predictions about the best investments to own. They opt instead for owning every stock, bond, or both in the markets they cover, or at the very least a sample or index of them that’s representative of the whole. The managers take this route because they believe that human progress will continue indefinitely, which will be reflected in the long-term rise in value of their stocks and bonds. A passive or index fund in Canada will cost you 0.1%-0.3% per year depending on what parts of the world it covers.

Which style has made investors the most money dependably over time? The evidence is squarely in passive investing’s corner.

Then there’s always the option of hiring a financial advisor to make all of your investment decisions for you. If you truly feel that you don’t have the time or patience to learn by yourself, this is the way to go. An advisor will probably cost you about 1%-1.5% of the value of your investments per year—and that’s on top of any fund MERs and TERs—but the fee is worth it if it frees up your time to do more of the things you love.

Now you have a good working sense of what it costs to invest, making you better prepared to make informed financial decisions.

Feel free to ask any questions in the comments!

If you are ready to learn how to invest on your own, have a look at my new investing guide for young Canadians. It’ll give you the tools you need to put your money to work in index funds in no more than an afternoon.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

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January 4, 2021

Young Canadian Investor #19 — The Cons of Financial Independence

For the purposes of this article, I’ll say you reach financial independence when you have enough money and/or investments to cover your expenses without ever having to work again.

It’s an important goal for a lot of 9-5ers who work decently-paying jobs that don’t mesh with how they’d like to spend their time. Maybe they want to be with family 24/7, maybe they want to travel all the time, maybe they want to write short stories all day and submit them to literary journals. It’s whatever makes you feel like you’re living the life you want, with the caveat that you should be realistic and thoroughly assess how close you can get to it. Here’s why.

  1.  Financial independence can become an overwhelming, all-or-nothing proposition. One where you give up a disposable income and with it any prospect of having fun for its own sake so long as you can save more money. And maybe you’re genuinely interested in travelling down this frugal road, exchanging nights out for pasta and cheap wine at home because you know that in 5-10 years you’ll have saved enough to free yourself from the daily grind. You should know, though, that there’s no point in saving half or more of your income if you’ll have to do it for decades to reach financial independence. In this case, there’s something to be said for investing less and living a little now instead of waiting until you’re 50.
  2. You need to have a clear sense of what to do with your hard-earned independence. Once you hit your magic number and have enough to support yourself forever more, how are you going to spend your time? It’s easy to get caught up the the thrill of the journey without giving due consideration to what you need to do to look back proudly on your life. Would you paint a new canvas every day? Dive into research projects that’ve been on the backburner for too long? Would you open up a coffee shop, source all your ingredients in ethical ways, and serve your community in a way you can be proud of? Your answer can change, and often, you just need to get a handle on what gets you out of bed in the morning.
  3. It’s not impossible to be fulfilled while holding down a 9-to-5. This entails finding a job you don’t hate or merely tolerate, one where you still have energy at the end of the day to go out, see people, and live a well-rounded life. There is nothing wrong with working for the next 40 years so long as it adds value to your waking hours, so long as it gives you a sense of purpose that makes you feel alive. Under this scenario, investing your money is still a must, but you can feel free to put less of your paycheck away knowing you’re comfortable working into old age. What would this ideal job be for you?

In the end, financial independence is a lifestyle choice, one that mostly appeals to people who value the freedom to do as they please day to day. If you’ve been searching for a short book to help you invest your money so you can get closer to tasting that freedom, my new effort is for you. It’s called Nine Steps to Successful Investing: A Guide for Young Canadians. In no more than an afternoon, it’ll give you the tools you need to invest prudently in the world’s stock and bond markets through index funds and fulfill your long-term financial goals.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Feel free to drop your questions in the comments!

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

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December 12, 2020

Young Canadian Investor #15 – Trusted Financial Sources

You can’t infer trust from any random person dressed in formal wear eager to tell you where the stock market is headed. This is especially true in a world where financial television stations like CNBC, Bloomberg, and BNN bestow their airtime on experts who pull economic predictions out of their behinds and aren’t held accountable for being unreliable.

What you’re looking for are financial professionals who can be objective with you because they don’t have to choose between giving you useful advice, or selling you products and services, even if you don’t need them, to ensure that there’s food on the table.

It’s hard to comb through the media landscape to identify people who focus on the needs of everyday investors, the ones who never learned money management in school, and treat the financial field as they do the medical one—with unwavering trust—when most financial advisors in Canada are actually under no obligation to put your bottom line before theirs. In the interest of facilitating the process, get to know a handful of people who have shaped my investing mind with solid fundamentals for long-term success.

common sense investing

Ben Felix is a financial advisor who runs a YouTube channel called Common Sense Investing. It’s great for in-depth but digestible explanations of core investing concepts, plus a fair amount of content that will take you far into the investing weeds. I like Ben’s work because he backs his points up with academic research and isn’t afraid to call out active managers for lining their pockets with client money before bothering to grow what’s left over. He’s also very blunt, which I find refreshing. All he’s trying to “sell you on” is the upside of taking the reins of your financial future.

canadian couch potatoOne reason Ben can be so forthright about his peers is that he works for a firm that is way more transparent about its strategies and fees than the major Canadian banks. One of his colleagues there, Dan Bortolotti, is the creator of the Canadian Couch Potato, a pioneering blog and podcast dedicated to helping everyday Canadians understand the benefits of investing through index funds. Unlike picking individual stocks and relying on your research to ensure satisfactory returns, index funds allow you to own a piece of the global stock market for cheap, thus hitching your money for a ride on capitalism and human progress as you save more of it. Dan is one of the leading index fund proponents in Canada; a contrarian stance in a country where most advisors steer clear of index funds because they get paid the least for recommending them.

plain bagel

Richard Coffin, an investment analyst in Ottawa, operates a YouTube channel called The Plain Bagel. He uses his platform to run through basic investment concepts, much like Felix, but in a broader, more accessible style that emphasizes humor and entertainment. His Q&As and April Fools videos are prime examples of this. If you’re as new as it gets to stocks and bonds, I’d say start here.

money school canada

Preet Banerjee, a popular financial consultant and speaker known for his many media appearances, sits somewhere between Coffin and Felix when it comes to pedagogical use. On Money School Canada, he pairs his slow and measured approach to unraveling terminology with your favourite teacher’s enthusiasm and production value that helps break everything down into constituent elements.

Does anyone worthwhile come to mind to complement this post? Feel free to drop their name in the comments. Everyone’s journey to financial independence will have its own unique twists and turns and I’d love to know who’s been there to help you along the way.

If audio is more your thing, check out my favourite investing podcasts part one and part two.

If you’ve been searching for a short, no-nonsense guide to walk you through the process of index investing, you can pick up a copy of my new book, Nine Steps to Successful Investing: A Guide for Young Canadians.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Feel free to drop any questions in the comments!

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

Leave a comment
December 5, 2020

Young Canadian Investor #14 – The Downsides of Stock Picking or Active Management

If you’ve ever thought it’d be a good idea to pick your own stocks, as opposed to investing in broad index funds, I’m here to dissuade you.

1200px-Wall_Street_bubbles_-_Always_the_same_-_Keppler_1901

Illustration by Udo Keppler.

  1. For one, if you invest in a fund that tracks the global stock market, it’ll never go to 0 unless the world ends. If you buy $1000 worth of shares in a single company you believe in, on the other hand, it could fall on hard times, causing the share price to plummet, and with it your ownership stake.
  2. The only way stock picking can work out is if you treat the endeavor like index investing, by which I mean owning stakes in a diversified group of businesses and holding them for decades. To follow through here, your research needs to support the long-term success of these businesses in spite of temporary drops in prices per share. It’s common for great investments to drop by 50% or more on their way to paying off for you. Will you be able to keep your convictions and hold on, or will you cave at the first whiff of trouble, make up an excuse, and panic sell at a low price like most self-directed investors? What makes you so sure that the investments that have caught your eye aren’t just the latest overpriced fads everyone and their grandmothers are joining the herd to own?
  3. To produce high-quality research, you need to take the time to learn how to evaluate a business as it stands to make a judgement about its future prospects. If you’re interested in building up savings over the long term so you can live with dignity through your golden years, this is not something you can do casually when the fancy arises. You’ll have to immerse yourself in the intricacies of balance sheets, income statements, cash flow statements, and quarterly and annual reports at a minimum to give yourself a chance.
  4. As an active investor trying to earn returns above the global stock market as a whole, or at the very least your national stock market, history is decidedly against you. Over 10 years, you’re looking at about a 20% success rate among professionals, with the percentage dwindling the farther out in time you go. Compare this to participating in your national stock market by owning an index fund that tracks it, which will provide you with that market’s return year in and year out minus a very small fee.
  5. Speaking of fees, one of the hardest parts about making active investing profitable is keeping commissions under control. You usually pay $5-$10 per transaction when buying or selling stocks, while index funds can be bought on Questrade for free.
  6. It’s also important to realize that, if you buy individual stocks in your RRSP or TFSA and they permanently tank, you can’t get that contribution room back. It might be hard to feel strongly about the benefits of accounts where investments can grow tax-free, especially if you’re young and justifiably all about the now, but it’s basically free money. You’d be doing your future self a huge disservice by letting it go to waste.

Still feel like building wealth by buying shares in individual companies? It’s not that it’s impossible to do well for yourself in this way. There are plenty of examples out there of people who dedicate their lives to investing through in-depth research and make a decent living off gains, as opposed to investment management fees they’re paid whether or not they produce satisfactory returns for their clients. If you’re consumed by your passion for picking stocks, by all means, have at it. But if you’re not, I wish you more than luck.

If you’re interested in learning how to invest through index funds and you’re looking for a concise guide to see you through the process—from establishing financial goals, to opening an RRSP or TFSA, to purchasing your investments and caring for them year to year—you’ll likely find my new book to be of service. It’s called Nine Steps to Successful Investing: A Guide for Young Canadians. It uses plain language, and draws from some of Canada’s leading voices in personal finance, to set you up with the fundamentals you need to grow your money as a self-directed investor.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Feel free to drop your questions in the comments.

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

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November 28, 2020

Young Canadian Investor #13 — The Benefits of Delayed Gratification

Far be it from me to tell you to not indulge in the pleasures of youth, whatever those amount to for you. You need to fill your time with experiences now to be able to look back fondly on them later when energy, passion, and priorities have evolved you into a different person. Don’t worry, I’m not here to be a wet blanket.

What I’m here for is to illustrate how investing is the bridge between your horny, idealistic, sleep-deprived self to the person you’re going to become after you’ve lived your fair share. It may not be immediately worth it, but investing now can lead to opportunities that aren’t presently available to you.

“The answer is dreams” — Haruki Murakami, Sputnik Sweetheart.

If you follow through on some of my suggestions about saving money, invest in stocks for at least a decade, and stick to making regular contributions, that extra 40 or 50 grand just lying around, while unimaginable now, will be available for you to take the next major step in your life. That may be starting a business, starting over somewhere new, or putting a down payment on a house, really any fantasy turned into tangible reality due to the benefits of compound interest and living below your means.

If I may get a little heady and sentimental, what do you dream about? If I may get a little more to the point, you already know that time is an inexorable progression toward pushing daisies, so what are you waiting on to move closer to the life you want?

It’s really all about rustling up your first $1000, investing it in a TFSA, and contributing to it from there until you reach your target number. If you think this investing business is too complicated for you, I beg to differ. My new book, Nine Steps to Successful Investing: A Guide for Young Canadians, will walk you through the process in plain language in no more than an afternoon. Give it a go if you’re ready for your nest egg to grow at a considerably greater clip than the pennies your bank throws into your savings account every month.

Feel free to drop any questions in the comments!

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

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November 15, 2020

Young Canadian Investor #11 — My New Investing Guide for the Youngins (of Which I Am One)

Quite thrilled to announce that I have a new book out called Nine Steps to Successful Investing: A Guide for Young Canadians. Its purpose is to walk you through the investing process, from figuring out what you’re saving for, to opening an RRSP or TFSA, to putting your money to work in the world’s stock and bond markets through index funds.

I tried to be efficient with words and not wander down many rabbit holes to avoid trying your attention with subject matter that tends to put most youngins to sleep. Explanations are just as long as they need to be with links to digestible sources for anyone interested in learning more.

If you’ve been thinking about investing, have the sense that you’d like to approach it yourself—as opposed to hiring a financial advisor—and prefer a lean primer as opposed to 300 pages of fluff, this book will put you on the right track in no more than an afternoon.

You can find copies here.

 

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April 22, 2020

Young Canadian Investor #9 – Useful Investing Tidbits

1. Why own stocks? Because owning one is equivalent to buying into the productive power of that company’s employees to sell products/services and make money. The better they perform, the higher the stock’s price, the more wealthy you become, and the quicker you can do as you please with your time.

2. Talking heads on financial television always come with an agenda, whether that’s sugar-coating the strengths of an investment they already hold or plan to, or supporting federal or monetary policy they would end up benefiting from. The same goes for interviewees espousing the benefits of spending within your means and making regular contributions to a retirement portfolio of stocks and bonds. One avoids being whipsawed by conflicting advice by having a financial plan and sticking to it.

3. Anytime you hear anybody make a prediction about where the stock market will be in the future, you can be sure that they’re mistaken, or lucky if they turn out to be right, regardless of the credentials they hold. Consistently predicting the future isn’t within the purview of human intelligence.

tech meme 1

Technical analysis at work. Courtesy of wallstreetbets.

4. Unlike the USA, where buying stocks commission-free has been widely adopted, Canadians still pay anywhere between $5-$10 per buy or sell order. The best exception here is Questrade, where you can buy ETFs for free.

5. Much maligned for offering mostly super-expensive mutual funds, and fees for advice that only the gullible or misinformed should pay, Canada is slowly improving in terms of providing everyday people with access to fairly-priced investments and the information they need to understand them. Common Sense Investing and The Plain Bagel come to mind as two sources worth your eyeballs. If you’d rather read, MoneySense is a good place to start.

6. The worst thing you can do with your stocks is find yourself having to sell them when they’re down because you need the money. Another way to put this is that you should only invest money you don’t need to cover your expenses, including emergencies. That way, you’ll be able to hold on during good markets and bad and take advantage of compound interest.

7. Technical analysis, or investing based on the price movement of assets like stocks and commodities, is the financial equivalent of LARPing, or choosing to inhabit a world that runs by whatever principles you choose. Its basic premise, that you can predict buyers’ and sellers’ motives by studying price charts, refers directly back to numeral 3. 

8. If you’re interested in picking individual stocks as opposed to or in addition to owning index funds, you need to be willing to dig into companies’ financial statements. In Canada, you can find them on SEDAR, or the System for Electronic Document Analysis and Retrieval.

9. Canada’s economy is made up of roughly 35% Banks, 20% Oil and Gas, 10% Industrial Manufacturing, and 10% Basic Materials like lumber and metals. Technology is only around 4%, with Health Care bringing up the rear at 0.5%. In the USA, on the other hand, Technology represents about 20% of the economy, and Health Care is 15%, which demonstrates the benefits of diversifying your investments beyond your home country.

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

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April 15, 2020

Young Canadian Investor #8 – The Downsides of Index Funds

Thanks to the efforts of the late, great, Jack Bogle, index funds have opened up the world of investing for everyday folks in a simple, cost-effective way.

Now, pretty much anyone can open a brokerage account, invest commission-free in a handful of index funds that own stocks all over the world, and thus piggy-back off humanity’s industrial might to improve their financial futures. 

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Tell em Queen.

That said, these funds are not panaceas. Even though they’re the best option around for %99 of people fortunate enough to have spare cash lying around to invest, they are not without their faults.

1. Most index funds that track the stock markets of entire countries are market-cap weighted, meaning that the more a company grows in value, the more of its stock the fund will have to hold. The problem here is that, since stock prices are not only based on company performance but also on investors’ expectations about how companies will perform, investors’ expectations can and do frequently lose sight of how well or poorly a company is doing. That means stocks are often cheaper or more expensive than company performance merits. But the market-cap weighted index is designed to ignore these discrepancies and simply buy or sell in line with investors’ expectations without stopping to question them. One workaround is to integrate valuation into your investing process by considering which countries are cheaper or more expensive than others at any given time.

2. Because indexing has become so popular over the last decade, the investment companies that offer these funds have become increasingly larger owners of the businesses held by the funds. Right now, Vanguard, BlackRock, and State Street (The Big Three) own a little over 20% of the S&P 500 (the 500 biggest companies in the USA). That’s an issue because shareholders get to vote at company meetings to choose boards of directors and have their say regarding future plans. If you invest in an S&P 500 index fund, it’s the fund provider and not yourself that gets to vote for the 500 companies. If three investment companies basically have the reins of the USA’s capitalist machine in their hands, that smells of antitrust, and government intervention can’t be too far off. The Big Three vote in line with company management, so there’s been no rocking of the boat, but the door is certainly open for them to. We’ll see how long that lasts.

3. Another flaw to be mindful of is that index funds concentrate investor behavior. If you’re a stock picker or active investor, you’re going to own a handful up to maybe a couple hundred stocks based on your analysis of what a business worth owning looks like. If you buy into broad indexes, on the other hand, you buy into entire stock markets, including the outstanding businesses, the mediocre, and the ugly. So if an index fund investor decides to buy or sell a portion of their globally diversified holdings, they are essentially buying or selling a tiny part of every stock in every major index in the world, whereas the stock picker would only be buying or selling the specific stocks they own. In times of market distress, such as the virus-induced stretch we’re currently living through, it’s easy to see that a wave of selling from index investors can have an outsized effect on the markets simply because they own all of them. The more people index, the more pronounced this effect will be, and the more important it becomes to brush up on your investing basics so you never let fear get the best of you, and you recognize that, when index fund prices drop, that means they’re on sale, so you should buy more shares if you can instead of running for the hills.

In spite of their flaws, index funds still guarantee you the returns of the markets they track minus very low fees. They’ll also beat the vast majority of stock pickers over the long term, so long as you maintain regular contributions, choose an appropriate time horizon and risk tolerance, and keep your emotions in check. There is no doubt that everyday investors like you and me would be way worse off without them.

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

 

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April 8, 2020

Young Canadian Investor #7 — Some Context to Minimize Panic

Arguably, the hardest part of investing for the long term in individual stocks as well as broad stock index funds—this includes funds that track the Total US Market, Developed International Markets, Emerging Markets, or the Global Stock Market— is keeping your psychology in check during market extremes. 

When funds have been going up for a handful of years, most of us think the trend will continue and want to buy more shares. Even though we have to pay an increasingly high price to do so. 

When funds have been dropping for a long stretch, most of us figure it’ll get worse and feel we should sell. Even though prices haven gotten cheaper and thus more appealing.

Why do we act like this? Human nature.

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How do we fix it?

One. By setting a range for how high and low stock markets can go, as per the historical record, to get an idea of good lows to buy more of, and good highs to dollar-cost-average into until prices improve. Selling investments should be limited to the reason you invested in the first place. 

How much can markets rise before a recession knocks them down to fair value? Australia’s stock market went more than a quarter century without one.

How much can a country’s stock market drop, and how soon? Eighty percent is a reasonable worst-case scenario. This happened in the US over two years in the late 1920s and early 1930s with the market taking over 25 years to recover. It happened again, this time over a couple decades, during the double-digit inflation of the 1960s and 1970s. 

Historically speaking, though, any time a broad index is down double digits (over 10%) constitutes poor performance and thus a buying opportunity/sale/good deal. This with the knowledge that it could drop another 50% or more and get that much more affordable.

Two. By remembering that, excluding problems with the fund’s management or issuing company, a broad market index fund going to 0 would require the industrial complexes of the countries it tracks to go out of business too. And it’s next to impossible for that to happen, whether in Canada or Spain or South Africa. Barring an apocalypse or investment company bankruptcy, dips in your index funds’ prices per share will eventually recover. It may take many years, so it’s up to you to ensure an appropriate time horizon.

Three. By holding firm that, to benefit from investing in stocks over the long term, i.e. make money, you have to invest regularly and stay invested—continuously— in a globally diversified portfolio for a minimum of five years but ideally for a few decades or more.

That’s essentially how you watch your index funds drop in value without panic-selling to avoid the stress. Easier said than done? Perhaps. 

But when you compare how inflation currently cuts what you can buy with the money in your savings account by 2% per year, every year, with a globally diversified portfolio’s long-term expected return of 7% per year, giving into fear looks a lot like very slowly going broke.

You can learn more by reading my introduction to investing for young Canadians.

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

 

 

 

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