questrade | Trevor Abes: Writer

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.

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Illustration by Udo Keppler.

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.
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?
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.
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.
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.
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.

November 21, 2020

Young Canadian Investor #12 – How to Save $1000

The smallest amount of money you can invest in Canada without having to pay a fee for the privilege—usually $25 per quarter—or commissions on transactions—$5-$10 a pop—is a grand at a brokerage house called Questrade. A brokerage house simply provides a platform where investment buyers and sellers can make their orders.

The problem here is that, if your investments fall below $1000 in any given quarter, Questrade will charge you the fee unless you make one trade in any amount. To avoid all this time wasted monitoring your balance, what you really need is to start investing with an amount that could fluctuate in value, due to the ups and downs of the stock market, without much of a risk that you’ll fall below the threshold. Seeing as 50% drops occur about once every decade or more, this post should be called How to Save $2000, stock market history considered.

If you have cable, you’ve probably seen Questrade’s commercials where young 20- or 30-somethings sass some sense into older, crustier financial advisors for their high fees. As the broker with the lowest minimum in the land, this is entirely by design. Compared to the big banks, where $5000, $10000, and $15000 minimums are prohibitively in place, youngins have nowhere else to turn. To be fair, you could invest in a TFSA at CIBC with no fee and a $500 minimum, but you’d still have to pay $7 per transaction. Question is, how do you get that two grand in your hand in the first place? Ponder my suggestions below.

If you receive a regular paycheck, shift 5%-10% of it into a savings account each time. The amount should be small enough that you won’t feel like it’s missing.
Think about the money you spend on personal entertainment like books, music, games, and eating out, and make small cuts such that you end up with a reasonable bit of cash, say $100, by the end of three months. Obviously up the amount if you are able.
If you eat out as a matter of course, learn to cook. Seriously, be willing to mess up, experiment until you find your comfort zone, and it will pay off. When you cook from home, you don’t charge yourself extra to pay for rent and staff salaries. That means your fried chicken dinner will cost you $5 instead of $15.
Remove brand influences from your life by shopping for generic brands and netting yourself the savings, which can be 25% or more.
Consider subjecting yourself to ads and using the free version of Spotify for a good long stretch. You could also cancel your Netflix or Crave subscription and opt for your local library’s free streaming service. You’ll probably only get to stream a limited number of recordings per month, so complementing your viewing with creative YouTubing would become a must.
Adopt a big-picture perspective and identify things you spend money on but don’t use and/or need. Beyond mere entertainment, this could include balance protection insurance on your bank account, a gym membership, or extra cellphone plan features bloating your monthly bill.
Give yourself time to accomplish this goal, even if it’s a year or more. Your means are what they are and improving them requires you to simply begin.

While this list is by no means exhaustive, it should add up to meaningful savings over a reasonably short timeframe if you put it into practice as a whole.

If you’re curious about investing and have been searching for a short, no-nonsense guide to help you get started, have a look at my new e-book, Nine Steps to Successful Investing: A Guide for Young Canadians.

Feel free to drop any questions in the comments!

April 29, 2020

Young Canadian Investor #10 – Common Investing Questions Answered

1. Don’t I need to already have a considerable amount of money to invest? Not anymore. It used to be commonplace for funds to have $1000 or $2500 minimums to invest, but you can now buy ETFs for free on Questrade without a commission, even if it’s one share at a time. And just for reference, the Vanguard FTSE All Cap Canada ETF, which invests in a basket of stocks meant to represent the entire Canadian stock market, currently trades for $26.03 per share.

2. What’s wrong with enjoying myself and my money now if life is short and you never know what could happen tomorrow? Nothing at all. In fact, another way to look at investing is as a way to prolong your enjoyment of life until the very end. It’s a trade-off, really, between putting a few dollars away without sacrificing too much in the now, and risking going broke when you can’t work anymore. Whether that means saving $100 a month or $10000, the point is that your future self will really appreciate it.

3. This investing stuff is way too complicated for me. Has anyone put it all into plain language so I can educate myself at my own pace? Yes, indeed. Behold.

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4. If investing in the stock market is so great over the long term, and helps set you up for a more comfy retirement, why do only about half of Canadians engage in it? Because holding stocks for decades requires a strong stomach. It isn’t easy to watch your globally diversified investment portfolio drop by 20% about every five years, and by a third to half or more every decade or so, on its way to providing you with an average 7% return.

5. What’s inflation? Inflation refers to the sustained rise in price that most goods experience over time. In Canada, it’s 2% a year or so, meaning that the 7% return mentioned above is actually 5% adjusted for inflation.

6. Isn’t a house a better investment than putting money in the stock market? No, because of the money it costs you to maintain and live in it. Here’s a detailed breakdown courtesy of Ben Felix, an investment and financial planning professional based in Ottawa.

7. Can’t I just save money instead of investing? Sure, so long as you’ll be able to give yourself the life you want when you’re older. If you save $300 a month for the next 20 years, you’ll have $72,372 by the end of it. If, instead, you invest that money, and earn a 7% return over the same period, you end up with $157,489. Give this compound interest calculator a whirl and figure out how much money you’ll need to lead your idea of a good life.

Feel free to drop any questions in the comments!