etf iestig p p p - amazon s3 · etf iestig ir mpm pm p 2 $ table of contents chapter 1. ... high...

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ETF INVESTING Low Maintenance & Stellar Returns$

Kyle Prevost - youngandthrifty.ca

http://youngandthrifty.ca/ebook

` Kyle Prevost - youngandthrifty.ca

ETF INVESTING Low Maintenance & Stellar Returns

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$TABLE OF CONTENTS

Chapter 1How Can I Make You $248,484.92, While You Chill On Your Couch?!.................................................3

Chapter 2: My Story............................................................................................................................8

Chapter 3: What the Heck is ETF?......................................................................................................10

Chapter 4: Why Most People Can’t Beat The Average and Why You Shouldn’t Try..........................13

Chapter 5: Why ETFs Kick Mutual Funds’ Butt!..................................................................................22

Chapter 6: What ETFs Belong In My Portfolio....................................................................................31

Chapter 7: Exotic ETFs........................................................................................................................37

Chapter 8: Potential Drawbacks of ETF Investing and How To Minimize Them................................38

Chapter 9: Getting Started With ETFs In 99 Minutes or Less.............................................................41

Resource Page....................................................................................................................................43


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How Can I Make You $248,484.92, While You Chill On Your Couch?!

I feel guilty for even using a headline like that (what does it even mean without context?), but it is actually true! The way I arrived at that seemingly random (yet oddly attractive) number is by taking the average of the S&P 500 over the last 200 years – 10.4% (rounded to 10%) and subtracting the average fees that mutual funds charge (a Canadian-specific 2%).

I then made up a random investor whom I determined would be a great test case. This “Investor X” would start saving at 20 years old and save $100 a month for 40 years. By investing with ETFs Investor X would have $584,222.17 when they turned 60 (assuming non-taxable compound interest). If they invested in above-average mutual funds that matched the market average, they would have $335,737.25.

The difference gave me your headline, and since investing in ETFs has literally been labelled “couch

potato” investing, I thought it was appropriate if sensationalistic. So here’s the deal guys:

then you had really better look someplace else! While some people are attracted (or even addicted) to claims of semi-magical methods of how to quickly gain wealth, I’m hoping that you are the type of responsible person that is looking to maximize their investment dollars without having to pore through piles of income statements and balance sheets every night.

If this sounds like you, then congratulations on taking the initiative to put yourself in the driver’s seat of building your portfolio and guaranteeing yourself a bright financial future.

Enjoy Life, Let Your Money Take Care of Itself

I can confidently say that I have plan for efficiently growing your nest egg and it won’t take you away from your spouse or children for weeks at a time. It allows you to gain the benefits of being invested in stocks, without all of the risk normally involved. If this sounds

If you’re looking for the Holy Grail ETF trading formula that allows you to make millions overnight without any work at all …

Chapter 1



` Kyle Prevost - youngandthrifty.ca


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$like something you’d be interested in, then please, read on to become an expert on the world of Exchange Traded Funds (ETFs). If you’re looking for “PENNY STOCKS THAT WILL YOU MAKE MILLIONS” then do yourself a favour and just go light your money on fire (the warmth will give you more pleasure than watching your portfolio spontaneously combust).

Here are the cold, hard, facts about the stock market and investing in equities (stocks). If you can confidently predict which companies hold a competitive edge in their sectors, and identify that they are undervalued, you CAN make a lot of money in the stock market. It’s mathematically possible you could average yearly gains of 15-20%. Just remember, that when you buy a stock, someone is selling that same stock, and they are fairly certain that they are getting the better of the deal.

Now if you’re sure that you’re the next Warren Buffet, Charlie Munger, or George Soros, then I seriously need you to pay me something for this book. I know I said it was free, but if you’re guaranteed to be a billionaire, then I really deserve something for it don’t you think? In all seriousness, guys like Warren Buffett are able to identify undervalued companies through a combination

of financial analysis and investing instincts that is almost impossible to replicate, and definitely not without a substantial business acumen. Instead, I would advocate for an approach based on ETF investing, where you are guaranteed to enjoy the high Return On Investment (ROI) of the asset class, without all of the inherent risks that come with trying to be the next “Oracle of Omaha” (Buffett).

My Grandma Versus Warren Buffett

I recently read an anecdote by a guy named David Chilton who wrote the personal finance gospel “The Wealthy Barber.” The brilliant example he gave is the best argument for ETF investing that I have ever read. He used his mom as part of the story and explained that she was the perfect example of someone who knew nothing about investing. Chilton wrote that the simple truth was that if his mom was in an investing competition with three brilliant stock traders (say Buffett, Soros and Munger), and they each picked stocks from the


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ETF INVESTING Low Maintenance & Stellar Returns$same pool until they were all gone (think of it as a hockey pool for finance guys), then her chances of beating any one of these three gentleman was almost zero; however, by simply purchasing an ETF of the entire market that they were all investing in, she was guaranteed to equal or beat at least one of these investing legends and possibly two.

If these four investors were the only investors in the whole market then there will likely be “winners and losers” between the four investors. Now common sense says that if they were picking stocks the results might look something like: Ms. Chilton -20%, Buffett +12%, Munger +10%, and Soros +8% (assuming the market as a whole had a 10% ROI). After all, this is what these men do professionally, and they have proven themselves to be amongst the best in the world at it.

IF Ms. Chilton decides to simply buy an ETF of the whole market though, now these investing legends are battling against each other for their gains. Ms. Chilton would now be guaranteed 10%. If we believe that Buffett is a genius and hits a low (for him) 15% gain, then statistical averages tell us that at least one of other two investors – Soros and Munger, must be a “below average investor” in this mock market we have set up.

By simply deciding to spend 20 seconds on her investment decision, Ms. Chilton would have assuredly beaten one (and quite possibly two) of the greatest investing minds of all time!

Obviously this example is very artificial, but the principle of someone who spends 30 minutes a year on their investment portfolio consistently beating out some very smart people is not only realistic, it’s a statistical certainty!

I Can’t Promise “Get Rich Quick” Just “Get Rich Eventually”

This eBook won’t make you rich tomorrow. In fact, if you haven’t already gotten a handle on personal finance basics such as steering clear of consumer debt, and saving a sizeable portion of your income, then the information won’t really help you much at all. I could tell you it would, and then try to sell you some land I recently purchased near Vegas…

This is a guide for practical investors that want to see their money grow, yet want some assurances that they won’t suddenly lose everything. Most people I know want to make sure they are comfortable in retirement, and want to start enjoying that




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$retirement as soon as possible. They also hate looking at excel spreadsheets, and have no idea what an "economic moat" is or what a good cash flow-to-debt ratio looks like. Most of them hate paying the banks large percentages of their hard-earned money, and would rather seek a simple solution than a complicated one. ETFs are ideal for this sort of do-it-yourself investor who wants to understand where their money is going, but also realizes that it is not realistic to expect to be on the level of money managers like Buffett.

By taking a single hour to read this eBook and putting its principles into action, the average person can accomplish these goals of seeing their investments grow, while enjoying what life has to offer. After all, who wants to be comparing leveraged positions when you could be going for a walk with your husband or wife, spending time with your kids, or having a cold one with your buddies?g portfolio!

By the way, I recently read that the average American reads at a speed of 200 words per minute. That means that the amount of time it took many of you to read the introduction of my eBook is actually 1 minute more than I spend every month on my investing portfolio!



ETF INVESTING Low Maintenance & Stellar Returns$Disclaimer:

Before we get too far into things I should remind everyone that I am not a certified expert in the field of economics, nor do I have a degree or diploma in a financial field. The information that I’ve presented in the following pages is my honest assessment of the current financial climate, and the best decisions for the vast majority of investors. I believe that my assertions are supported by the solid amount of credible evidence that I reference. That being said, please do not take my word as investment Gospel. I fully encourage all of you to seek help from a fee-only financial advisor before proceeding along any investment path if you are not comfortable doing it yourself. I likewise encourage you to read and soak up all the information you can in regards to how to save and grow your money.

I have decided not to charge anyone for this eBook and subsequently I ask that people accept that I do have a few affiliate links included within these pages that might provide me with a few bucks. I personally stand behind and recommend the products that I reference in this eBook and believe you’ll find the companies have great track records if you look for online reviews.

I have asked for your email so that I might send you future special offers for eBooks that I produce, and also to ask for what else you might like to read going forward. Thanks for your support. I hope the effort I put into making this book easily accessible, yet full of information I consider valuable, will result in a quality reading experience that you’ll want to share with your friends.




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So who is this ETF guy and why should I listen to him?

That is a pretty important question! We are bombarded with information from all angles these days and we survive by discarding the vast majority of it out of hand. We do this because it isn’t

immediately important to us, we have 101 other things to worry about at the moment, and there will be more information coming very soon.

Many of you are probably already thinking of leaving since we are built to think, “Hey if this guy is giving this information away, then how valuable can it be?” The truth is that I am definitely not an accredited financial advisor. My name is Kyle Prevost and I’m certainly not rich - yet. I don’t have a team of researchers, and I don’t have any magical information that no one else has ever presented. What I do have is a common sense method of growing your money that is explained in terms that all of us can easily understand.

While I am a do-it-yourself investment superhero by night, by day, I am actually a high school business teacher; consequently, I like to think that one of my strong suits is communication, and I am definitely practiced in breaking concepts down into easily digestible pieces. The one thing I can absolutely promise you is that this book will easily surpass the value of what you paid for it ;)

My Name Is Kyle and I Am An Addict

I’m addicted to learning about investing, how the markets work, and why so many smart people screw up their investment plans so badly. I became interested in personal finance several years ago and am primarily attracted to the freedom it can bestow upon those who are willing to learn its truths. Basically, I love the idea of being able to work on my own terms by the time I hit 40 or 45. Right now, I am fairly early in my career and I am able to save roughly 30% of my income.

My significant other recently began her career as well and we’re really looking forward to being able to save a much higher percentage of our overall income going forward. Since learning about the freedom that comes as a result of watching your investments grow and compound on each other, I have read 80-100 books

My StoryChapter 2:


http://myuniversitymoney.com


ETF INVESTING Low Maintenance & Stellar Returns$on the topics of investing and personal finance, and have written all over the web for sites such as the Globe and Mail, Financial Post, and the blog I co-own: YoungandThrifty. It is primarily designed to help people become more efficient with their finances and have a good foundation for further financial learning (what they would have learned in high school if they had taken my business class).

I have also started up numerous sites that explore various types of ETFs. I have done extensive reading on all kinds of investing styles from dividend investing, to value investing, growth investing, “magic formula” investing, sector-cycle investing, real estate investing, and many, more. The truth is that any of these styles and methods can be effective in the right context, and with the right resources, but ETF investing using index strategies is consistently the investing method that proves to have the most widespread success with the largest variety of investors.

My Bank Account Grows While I Put My Feet Up

ETF investing has definitely formed the core of my push to financial independence. It will continue to be my focus going forward. I may dabble in other forms of investment

just for my own knowledge and entertainment, but the vast majority of my portfolio will be locked into the steady returns generated by ETFs.

I love coaching sports, spending leisure time with friends, and reading a variety of genres. While I thoroughly enjoy reading a good economics book (Michael Lewis may be my favourite author) I’m not huge on spending my evenings comparing specific balance sheets and cash flow documents; therefore, the ease of investing through ETFs fits my lifestyle and goals perfectly.

When it comes to my ETF choices I have kept mine fairly simple. I’ll detail some examples of what a portfolio based on ETF investing might look like later on, but suffice to say my investing philosophy revolves around taking advantage of the average growth rate of entire asset classes, without losing any of my hard-earned money to pesky fees and taxes. With the relatively young age I was able to start investing, the power of compound returns will definitely work in my favour, and the sooner you get started, the sooner you can put it to work for you as well!




So what exactly is an Exchange Traded Fund (ETF)? Well, an ETF is basically a pool of money that has purchased certain amounts of assets that include stocks, bonds, and/or commodities. Investors can buy “units” (as opposed to shares of a

company) that are valued based on the underlying assets that the fund has purchased. If this sounds a lot like a mutual fund, that’s because the two share a lot of similarities (I’ll soon explain why ETFs are a superior product).

One of the places where an ETF is very different from its mutual fund cousin is in how investors can purchase units of them respectively. As the name would infer, ETFs can be purchased, sold, and traded throughout the day on any major stock exchange in the world. Mutual funds lack this instant flexibility factor. This gives ETFs many of the attractive attributes of investing in stocks, while instantly diversifying investors’ portfolios.

What the Heck is ETF?Chapter 3: Just To Make It Sound Complicated

The baskets of assets that make up ETFs can vary to a huge degree. Most ETFs that I will recommend are very easy to understand, and you will have a great working knowledge of them after you are done reading this guide; however, just to give you an idea of the big picture in terms of ETF investing, there is now an ETF for basically any type of asset, or groups of assets you can imagine.

If you want to invest in stocks that represent the entire world, a single country, a group of countries, a certain industry, a certain commodity, or any other dividing group you can think of, there is probably an ETF for that. There are ETFs for every type of bond or groups of bonds you can think of, and there are ETFs that use all kinds of exotic ways to leverage your investments, as well as directly invest in any number of financial instruments.

I just want to reiterate that while this diversity in ETFs might make the topic sound overly technical and confusing, the core fundamentals of investing with straightfoward ETFs are easy to understand and execute.




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$KISS – Keep It Simple and Stellar(Investments That Is)

Initially, the vast majority of ETFs were created to simply track an index. The idea behind investing in the entire S&P 500 for example, is that you can efficiently diversify your

investment dollars with a single easy purchase of an S&P 500 ETF. Until 2008, ETFs were not allowed to be “actively managed.” This essentially means that all ETFs had to be chosen according to a pre-determined formula, and more or less guaranteed that the way an ETF was constructed was fairly transparent.

In the last 5 years there has been an explosion of ETF options, and some of them are good for specific types of investors, while many simply use the title of “ETF” as a marketing ploy. Most of this eBook deals with the original-style of ETFs and why they are the best option for about 98% of investors in my estimation. Just so you can show off at the water cooler at work, here is a little ETF trivia: The first ETFs debuted in the USA in 1993, and then caught on in Europe 5 years later.

It’s Not The Heat, It’s the Fees That’ll Kill Ya

Because the original types of ETFs (still the most popular by far) are fairly straight forward to understand and create, the cost of buying them is very low. These

investment fees have dogged investors in the past and ate into returns substantially (as shown in my original example).

The low cost of ETFs are amongst the most popular reasons for using them. ETFs have allowed the average do-it-yourself investor to get great average returns from their portfolio without spending hours and hours doing research, and without forcing them to pay the extortionary fees that the financial industry has thrived on in the past.

Some Might Say ETFs Are “More Elegant Than Sexy”

So, to sum up. An Exchange Traded Fund (more commonly known as an ETF) is a financial tool that allows investors to buy an underlying basket full of a certain asset. Investors purchase units of an



ETF INVESTING Low Maintenance & Stellar Returns$ETF (much like a mutual fund) and the price of the unit is based on the current value of the assets in the basket. They can be traded at any time on a stock exchange, just like shares of a company can be. Most ETFs are easy to understand, and very simple to invest in. This simplicity allows ETFs to charge very low investment fees. In the last 5 years or so there has been an almost infinite explosion in the number of ETFs on the market, but the vast majority of investors are likely best served by never going near most of these investment options, and instead just focusing on the basics within their portfolio.




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$Why Most People Can’t Beat The Average and Why You Shouldn’t Try

Chapter 4:

“Just do ______ and _______ and you too can beat the market!”“Simply follow these few basic rules to beat the stock market and make yourself rich in the process.”“If you use our secret formula for penny stocks you are guaranteed to make millions. Look, we did it, so can you!”

These are just a few of the very successful marketing pitches that have found their way into the world of investing over the years. There are certainly no shortage of people who claim that they know the special way to get you unbelievable returns on money. Whether it is the “value investing approach” of

Warren Buffett (which actually makes a lot of sense to me… if you are as good at seeing value as Warren Buffett is), the growth model that Peter Lynch espouses, or several other fairly well-known investing strategies that have all been in vogue at one time or another.

All of these have one thing in common: the promise to make you rich quickly by giving you investment

returns that are much higher than the market average.

So You Think You Can Beat The Street Huh?

The sad truth is that about 99.9999999% of people out there do not have anywhere close to the capability to pick stocks that will consistently outperform the market, no matter what strategy they choose. The outliers like Lynch, Soros and Buffett are extremely skilled, and were likely born to allocate capital (many would argue that they are also extremely lucky). Your buddy down the street that claims he has a system that is returning 15% a year over an extended time frame is either extremely lucky, doing creative accounting, or you took a time machine back to 2007 where everyone figured they had the system gamed.

Here is what I recommend, next time someone tells you that they know how to “Beat the Street” after watching a Gordon Gekko movie, compare the tone of their voice and their mannerisms to someone who believes they have a way to figure out slot machines. These people are essentially taking the same approach to growing their money – gambling it in the hopes of high returns. Todisguise this desperate attempt, and lack of true knowledge, the risk advocates will come up with



ETF INVESTING Low Maintenance & Stellar Returns$all kinds of crazy reasons to justify their system and convince you of its merits.

Efficient Market Theory (EMT)

Now you might be asking yourself, “Wait a minute, this guy who is saying picking stocks is for suckers, and claims we shouldn’t listen to people that have a ‘system’… Isn’t he trying push a ‘system’ of his own?” My best argument would be that I certainly did not invent ETF investing, and the mathematics behind my argument have been proven again and again since the 1960s and even before that to some degree. What I am calling ETF investing is simply the latest and cheapest way to apply the principles of what has been known as index investing. Buying a product that diversifies your money across hundreds of companies that make up the entire stock market is based on the idea of Efficient Market Theory (EMT) that began at the University of Chicago Booth School of Business over 50 years ago.

A professor there named Eugene Fama published a thesis that basically (I’m paraphrasing for brevity) proclaimed that because of supply and demand principles, each individual stock on the stock market was guaranteed to be priced fairly. The idea was that with information becoming so widely accessible (and this was well before the internet) investors could price in all the relevant information and the stock would be valued at exactly what it

should be. With so many investors trying to outdo each other by trading back and forth, Fama argued that the natural tug-of-war of the free market would make sure no one really had any advantage in trying to “Beat the Street.” The theory assumes that all investors will act rationally and have the relevant information to base their decisions on. Fama recently won a Nobel Prize for his work in this field.

Now I would be remiss if I didn’t say that many smart people have found serious faults with the specifics of this theory. In the short-term especially, we continually see that people do not act rationally. Emotions cause large fluctuations in the market, and these can be taken advantage of by very skilled traders to some degree. There is also the fact that not all investors have access to the same information (although one could argue that due to the internet the playing field is now more level than at any other point in the stock market’s history).

Many hedge fund managers that control hundreds of billions of dollars, as well as numerous corporate titans, have first-hand knowledge gleaned from networks of contacts that the average do-it-yourself investor will never have.

It is also possible that with the rise of the ‘quants’ (a totally different topic that I probably shouldn’t tangent into) certain investors have access to




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$advanced mathematics and the corresponding technology needed in order to take advantage of market momentum from one moment to the next. So, if you are skilled at reading the market’s emotions, have an inside track on if the newest pharmaceutical will be approved by the FDA, or are a genius with a supercomputer that used to work for NASA, I definitely think you should immediately exit this eBook and go about picking stocks.

For the rest of us mere investing mortals, the long-term truth of Efficient Market Theory still carries a lot of weight. To fully understand why ETF investing is better than these other systems, you must first believe that it is almost mathematically impossible for you to get higher returns than the market average.

Even though EMT has several flaws in the short-term that can be theoretically exploited by elite stock pickers, its long-term record holds up far better. Over a longer period of time, investors do act fairly rationally, and the principle of supply-and-demand does ensure that the price is accurate the majority of the time. So what does this mean for your investment portfolio? It means that in order to grow your money in the most efficient way possible, you should concentrate on parts

of investing other than what stocks to pick. The bottom line is that there are relatively few things that you can control about investing. The most important things, the things that you should be focusing on are: limiting the fees you pay as a part of your investment strategy, and what asset classes your money is in. I will go into more depth in a couple chapters about how to accomplish these goals.

Fees, Fees, FEES!

The scariest thing about stock picking and trading is not necessarily that you will be bad at it (although this a pretty legitimate possibility), but that even if you pick

stocks that return the average, or slightly above the average of the market (very difficult to do), the fees that you will pay in trading costs, analytical costs, and investment advice will eat away at your returns far more than most people realize. This isn’t even taking into account the opportunity cost of spending a day in the sun instead of pouring over stock information. Here is the scary truth:

To put those numbers in perspective, according to the Dalbar study, if I had invested $1,000 in 1990



ETF INVESTING Low Maintenance & Stellar Returns$A recent study by Morningstar (a trusted investment analysis website) stated that the average stock investor trailed the average returns generated by the stock market from 24% from 2001-2011. This study is not an anomaly. A Dalbar study from 1990-2010 showed that while the S&P 500 had an average return of 9.1% for the twenty year period, the average American stock investor achieved a 3.8% return. That is frankly unbelievable.

To put those numbers in perspective, according to the Dalbar study, if I had invested $1,000 in 1990 at the market average, I’d have about $2,000 in 1998, and $4,000 in 2006 (Quick little party trick: If you ever want to quickly calculate investment returns, just remember “The Rule of 72.” Simply divide 72 by whatever your expected investment returns will be and the result is the number of years it will take for your money to double. For example, if your expected rate of return is 9%, it takes 8 years for your money to double. It’s not as accurate for very small, or very high returns, but when thinking about averages, or trying to impress eBook readers, it’s very useful).

The average American investor however, if they invested $1,000 in 1990, would take until 2009 just to get to $2,000! How can this be you ask?

Well until fairly recently it cost the average DIY investor quite a bit of money per trade to buy and sell stocks. With the advent of the discount brokerage, you can now complete most trades for $5.00 per trade. I recommend TradeKing if you are an American resident and Questrade if you are a Canadian investor. I’ll give you some more details on these companies a little later in the show. When you are constantly trading stocks back and forth, these fees add up in a hurry, and you lose the power of compounding returns. It’s true that it was much more expensive twenty years ago, but it is still a major factor even today. Fama (the aforementioned professor) liked to say,

Even 1-2% in fees can seriously hurt your returns over a long time window. If you take my situation, where I started putting money into ETFs at 20-years-old, my investment window will be 35-40 years, and possibly even longer. The stock market has returned over 10% per year on average over the course of its history (including dividends and excluding any fees). Many experts believe that this average is overly ambitious going forward, so we will look at the number conservatively. When I was 20, I was able to invest $2,300 in ETFs. If I

“Your money is like soap. The more you handle it, the less you’ll have.”

http://youngandthrifty.ca/recommends/ebook-tradeking

http://youngandthrifty.ca/recommends/ebook-questrade




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$fell flat on their face. Study after study has shown that investors across all gender lines, ethnicity lines, demographic groups, and every other measurement ever invented all succumb to the same basic psychological weaknesses that we as humans have.

Our evolutionary responses have evolved over time to make us risk-averse. This means that we are much more afraid of losing, than we are happy to be striving for the win. Losing money hurts us much more than gaining money makes us happy; therefore, the end result is that we are extremely prone to rash acts when we begin to see our stocks slide downwards. This explains the irrational jumps that the market can take in a day. Are the combined companies listed on a specific stock exchange really 5% less valuable than the day before? Of course not, investors merely panicked and then proceeded to flood the market because they were afraid of losing money.

As human beings, investors are actually genetically predisposed to buying stocks when the market is humming long, and selling them

average an 8% Return On Investment (ROI), by 65 my principle will have compounded to $73,400! If I read tons of investing books, learned from my mistakes, became a very good investor and beat the average ROI by a couple percent, yet had 3% of my returns eaten up by fees, I would have an ROI of 7%. At this rate I would now have $43,305 when I turned 65. While still pretty nice, that’s a substantial difference, and that’s assuming that I was a whole lot better than the average American investor!

If Everyone Has a System, How Does Anyone Ever Lose Money?

Now that we all have a phobia of investment fees, I want to let you in on the other chief reason why the vast majority of investors never even approach average returns in their overall portfolio – basic human psychology.

You see everyone knows, “Buy low, sell high.” If you’ve read a couple of investment books no doubt you came across some catchy Mantras like, “Cut your losers and let your winners run,” “Bulls make money, bears make money, but sheep get slaughtered,” “Market timing is the key,” and so on. Many have come before you armed with these snappy credos… and then



ETF INVESTING Low Maintenance & Stellar Returns$when it is crashing – in other words, the exact opposite of, “Buy low, Sell high.” This emotional roller coaster is what you are signing up for if you want to try and pick specific stocks. Again, I want to reiterate, it’s not impossible to have success using this method – just very difficult and very unlikely.

Warren Buffett and his pal Charlie Munger have stated that they know full well that at any given time 40-50% of their company’s net worth could evaporate very quickly.

They are braced for this and have been through it before. If you believe you are equal to Mr. Buffett and Mr. Munger then you might want to venture down that path, but statistics say that it is extremely unlikely that you possess the attributes needed to succeed at stock picking.

Why Are ETFs The Answer?

So how do ETFs solve these major problems that we are genetically predisposed to? They certainly can’t cure every ill, but basic ETFs are the easiest way to diversify your investment dollar. By purchasing one share of a global market-based ETF you will get exposure to hundreds of companies that are spread out amongst various industrial

sectors, geographical locations, and have different consumer demographics. This means that while each company certainly faces their own respective risks, the risks to the overall ETF are very nullified. A global-based ETF would be created by a formula that sought to track the world’s economy so it would be primarily invested in large companies based in many different countries, that are themselves internationally diversified; therefore, in essence, you truly are splitting your investment dollar into thousands of different proverbial pots.

A similar situation exists for bond-based or commodity-based ETFs. ETFs allow you to take almost any amount of money, and efficiently invest it in the overall market (basically guaranteeing yourself that market average minus small fees). This diversification places an investor at a lot less risk than a stock picker who has entirely invested themselves in 5, 10, or even 20 companies. It also encourages long-term planning and less trading due to the mindset of investing in the overall market, and not in specific stocks. By committing to an ETF investing strategy you are admitting that you are better off playing the averages than trying to beat the market. This is strangely empowering, and allows you to focus on generating more income from your labour, or just




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$finding new ways to enjoy your leisure time.

Think About Who Your Opponents Are In This Game

Stock pickers play a really fun game. There is no doubt that gambling is a true adrenaline rush, and has entertainment benefits that ETF investing doesn’t have. No matter what system or strategy stock

traders claim they are taking advantage of, they are still gambling to some degree. There are so many unforeseen events that can take place in the world’s economy (has the last decade taught us nothing?) that you need to be pretty bright, fairly lucky, and commit a ton of homework time, to even have a shot at beating the market. I’d like to once again gently remind those of you that have stuck around to this point...

that there is always someone else on the other end of your trade that believes they have gotten the better end of the deal...

Often this person is a hedge fund manager who has access to information you don’t have, or a NASA-level mathematician who has forgotten more about numbers than you will ever know. Are you sure you want to compete against these people? If you are going to try your hand at the trading game, I would first calculate what you believe your transaction fees will be (even using my recommended discount brokerages), and think about the fact that you have to beat the market average by that much, just to break even with what you would have earned by easily purchasing an ETF.

Personally, I know my limits. I was sold on ETFs when I first read the term “couch potato investing” associated with them. Now keep in mind, while I’m no investment professional, I’m fairly confident I could explain the makeup of a derivative to you, have a solid grasp on how to evaluate a financial statement, and am a regular contributor to several of the biggest personal finance blogs in North America. I like to think I’m a fairly knowledgeable individual when it comes to personal finance, and micro/macroeconomics.





and I have nowhere near the resources or brains needed to compete with them on a consistent basis. I might be able to “beat the street” for a year or two by making a lucky/smart call here or there, but given a long enough time sample, I consider it virtually impossible that I could come out ahead, especially once my trading fees are calculated. I’ll stick to seeing a mere .07-.30% of my ROI chewed up due to ETF fees, as opposed to 3%+ trying to be Warren Buffett.

I Spend About 50x More Time Playing Fantasy Sports Than I Do Investing

I don’t mean to brag, but I might actually be the Warren Buffett of the fantasy football world (ladies raise your hand if your husband believes he knows everything about sports as well). I can tell you the spreads between the top WR and the #20 WR, where to find a value in a tight market, how to adjust your rankings for a different scoring system, and 101 other really nerdy things about fantasy football (maybe that will be the title of my next eBook). I can honestly say that in 10+

All the literature I have read has lead me to believe that the investing game is slanted big time in favour of the biggest fish,

years of playing fantasy football, there was only one season where I didn’t finish “up” after totalling all of my leagues (the Warren Buffett of fantasy football does not play just one league).

If I had to take a complete guess at my earnings over the 10 year time frame, I’d have to save that I’ve made around $2,000 (over and above my dues/fees). Since I’ve “invested” about $3,000 in league dues during that time, I’ve got a pretty decent year-over-year return going. The only problem is that in addition to the 3K in dues I’ve invested, I’ve probably put it about oh… 2,000 – 3,000 hours watching football and studying football statistics.

Let’s just agree that I don’t do it for the money! The point of this random detour (other than stroking my male ego) is that I like doing nerdy, geeky things and even I don’t like poring over financial stuff all day long.

ETF investing means that you can get better returns than the vast majority of investors out there, while doing almost NO WORK!




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$This is important because if you’re going to compete with my fantasy team next season you need all that extra time to be comparing catch-to-target ratios and not dividend ratios.

Allowing For Human Weakness

While in my head I know that ETF investing is by far the smartest strategy for me, I am not immune to the risk-driven style that so many of us crave! I love poker, and generally any

game where I test my wits against an opponent, and playing with stocks and bonds definitely holds a similar allure. Rather than constantly struggling to bury these instincts, I came across a great proposal online a couple years ago (unfortunately I can’t remember the source).

The general idea was to allocate a certain part of your portfolio as “play money.” In my case, in the future I plan to take 5% of the overall funds that I have invested and try to pretend I’m Warren Buffett (in fact, I respect the “Oracle of Omaha” so much, that probably half of what I do is directly related to moves I have read about him making). There is no doubt in my mind that I will probably

lose a little on this game in the long run, but I look at it as my entertainment, and at least the entire pot that we’re all playing for has an average return of 110%... far better than any casino game!



ETF INVESTING Low Maintenance & Stellar Returns$Why ETFs Kick Mutual Funds’ Butt!Chapter 5:

So having just looked at why instant diversification is such a great feature, most people would say, “Duh… my financial advisor spouted the same clichéd stuff about the magic of diversification… that’s why I am in the mutual funds he recommended me!”

Since I just stole ten minutes of your life in order to tell you how difficult it was to beat the market, I am now going to prove it to you all over again by explaining that professionals who get paid millions of dollars to do this for a living can’t even do it. These people are called mutual fund managers, and they are in on one of the biggest cash grabs in the world today.

The Shock and Awe Mutual Fund Sale

In case no one has stuck your nose in a mutual funds

book, the basic idea that many financial advisors like to sell you on (not ALL financial advisors go this route, but it has become a stereotype for a reason) is that you can have a professional managing your money for you.

The line, “Don’t you want a professional money manager that does this for a living picking your investments for you? You can’t lose with this guy, he has beaten the market average for the last two years! Plus, you should repeat after me: diversification, diversification, diversification.”

This is often followed by showing clients some fancy bar graphs, multi-coloured pie charts, and calling their fund a “5-star fund.” Most peoples’ heads are spinning by this point and they often just nod. A good salesman…*ahem… "financial advisor", will take advantage of our lack of financial literacy in order to assure us that we need to pay someone else a lot of money to manage our investments.But Kyle, EVERYONE Is Doing It

Mutual funds can’t possibly be bad if everyone is doing it right? WRONG! Let me ask you this question. It is a fact that many, many, mutual funds do worse than the market average (we’ll get




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$get to this), and a fair number usually collapse altogether every year. What do you think peoples’ financial advisor told them about putting their money in those funds?

“Ma’am, I have to tell you that this is kind of an unproven fund that carries a lot of risk, and we don’t really have any reason to suspect it’s better than average. There are probably much better choices out there, but this is the one I’m being paid to sell. You should probably buy it because it could be really good and I’m a really nice guy.”

My guess is that this strategy probably wouldn’t be very effective, and it’s likely not the one that was used to sell those mutual funds. The sad facts are that financial literacy is hugely lacking in our society, and to be honest, that is the only real reason why mutual funds continue to sell in such high numbers.

Hand In My Pocket, Hand In My Pocket

Help! The crazy teacher guy is going to start rattling on about fees again! If you thought the fees you were paying per trade in order to pick stocks were bad, just wait until you see what these

“professionals” are charging you for their expert skills. The term used to explain how much of your investment money will be taken away from you is called MER. This sounds innocent enough right? Well, MER stands for the Management Expense Ratio. There are many variations to how mutual funds take money

from you, but the basic idea of a MER is that it is an overall percentage of the value of the assets you have invested with a specific fund.

This is a great pitch for many mutual fund salesman (oops, there I go again, I mean financial advisors), because it means that it costs nothing up front, and the advisor will likely not charge you much at all for the “full-scale, all-encompassing, 360 degrees financial plan” that they draw up for you (in an hour) because they are going to make a lot of cash off of the money your entrusting them with!



ETF INVESTING Low Maintenance & Stellar Returns$charge the MERs regardless of how the fund does that year. Just because the manager of the fund did a terrible job and lost you a bunch of money doesn’t mean that he shouldn’t get his new yacht after all.

The best managers don’t even ask for more of your money – that’s how nutty this industry is (a 2010 Morningstar study actually found a low correlation that seen low fee managers actually perform better!).

MER – My Early Retirement? If Only…

So how does this MER stuff work? Well when you buy units of a mutual fund, you have to pay a lot of people along the way. The brilliant fund managers that look at financial statements all day will usually take between .5% and 1% of the total assets. Administrative costs soak up another .2-.4%, depending on how much marketing is included. Then your nice-guy fee-based advisor who was gentle enough to not gouge you much upfront, usually takes 1% of your assets from you as well.

I’m definitely very sensitive to high MERs because I live in Canada, the worst country in the world for mutual fund MERs, but the principle is still the same in the more competitive American market. The Canadian Average MER is about 2.1%, while the American market has settled at about 1.4%. These seemingly low percentage points end up becoming quite a big deal when you are talking about compound returns year-over-year.

But hey, you get what you pay for in life right? Well if you are buying a good pair of shoes maybe, but when it comes to your investments, this is actually not true much of the time. The first thing you should realize is that mutual fund companies

It is interesting to note that out of the hundreds of studies done on the topic, there is absolutely no correlation between MER fees (essentially, your cost to buy the fund) and results.




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$The Multi-Billion Dollar Question: Can Mutual Fund Managers Beat The Market?

The short answer is a resounding a NO! In 1973 a man named Burton Malkiel wrote a the-sis called A Random Walk Down Wall Street. The basic idea was to reveal to everyone that most mutual funds were not beating the basic market indices (averages). Malkiel wrote:

“What we need is a no-load, minimum management-fee mutual fund that simply buys the hundreds of stocks making up the broad stock-market averages and does no trading from security to security in an attempt to catch the winners. Whenever below-average performance on the part of any mutual fund is noticed, fund spokesmen are quick to point out ‘You can't buy the averages.’ It's time the public could [...] there is no greater service [the New York Stock Exchange] could provide than to sponsor such a fund and run it on a nonprofit basis [...] Such a fund is much needed, and if the New York Stock Exchange (which, incidentally has considered such a fund) is unwilling to do it, I hope some other institution will.”

Of course this sentiment is what eventually led to the low-cost ETFs that us personal finance geeks now know and love. The truth is that in any given year a solid percentage of mutual fund managers will beat the market average. The fact that only a minority of people that do this for a living can actually beat the market BEFORE their fees are calculated in should tell us something right off the bat. The real comparison between market averages (essentially, investing in a basic ETF) has to take the following points into consideration:

1) The difference in MERs.2) The mutual fund performance over asubstantial period of time.3) The bias of mutual fund statisticians toexclude the performance of past mutual funds that were so bad they were collapsed all together.

There was a recent study done by Laurent Barras, Olivier Scaillet, and Russ Wermers who are all notable academics within their respective economic fields. The study was called, “False Discoveries in Mutual Fund Performance: Measuring Luck in Estimating Alphas.”




This basically means that it’s possible that those 0.6% were just lucky. It is within the realm of possibility that there are no more mutual funds available that consistently beat the market average based upon skill alone.

The core of the article was the application of the False Discovery Test which sought to eliminate the exclusion of these former mutual funds that had disintegrated over time. The authors looked at a sampling of mutual funds from 1975-2006, and included funds that were currently active as well as those that had went defunct. They excluded funds that did not have a long enough time frame (five years) because it just doesn’t give a long enough record of performance to be meaningful. In total, the study took into account 2,100 mutual funds.

The findings were pretty dismal for the financial services crowd. The study found that on a pre-expense basis, 9.6% of all managers managed to beat the market. So 9 in 10 people that get paid to pick stocks for a living can’t beat the average. Now when we added in all yachts that had to be bought and calculated the funds’ performance with their MERs,

The study concluded that this number was statistically indistinguishable from zero and Professor Wermers stated,

the percentage of funds that beat the market average was 0.6%!

“The number of funds that have beaten the market over their entire histories is so small that the False Discovery Rate test can’t eliminate the possibility that the few that did were merely false positives.”




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$

Source: John Bogle, Common Sense on Mutual Funds : New Imperatives for the Intelligent Investor, p. 119.

John Bogle is the creator of the Vanguard company that has pioneered the market for low-cost ETFs. He has released several books that articulate his feelings about mutual managers and their inability to beat market averages. In a speech to the American Museum of Finance on Wall Street Bogle stated, “ ‘Hot’ managers were treated like Hollywood stars and marketed in the same fashion […] As the inevitable reversion to the mean in fund performance came into play, these stars proved more akin to comets.” Here is one of Bogle’s favourite charts:

General Equity Funds Outperformed by the S.& P.'s 500 Index, 1963 - June 30, 1998



ETF INVESTING Low Maintenance & Stellar Returns$Bogle basically claims that over an extended period of time, all managers will come back to the average baseline performance of the stock market. Once you take out their expensive fees, they are virtually guaranteed to give poor returns.

One common explanation for why an escalating number of managers cannot beat the market average over the years is because of the advent of hedge funds. Hedge funds are unique funds that allow their managers to do things that mutual funds managers can’t. They are basically given a large degree of freedom to do things like bet against stocks (called “shorting”) and hold large amounts of cash. Many of these managers do admittedly beat the market and they are paid extraordinarily well. The only problem is that most hedge funds require a minimum investment of about a million dollars.

Ever wonder where all that money goes if mutual fund investors can’t beat the market? Who is making all this money if the professionals are not “average?” The extremely simple version is that people who buy and hold successful stocks over long periods of time (Re: Warren Buffett) and

hedge fund managers that have access to insider information and a variety of other advantages soak up the vast majority of the winnings in this crazy casino that mutual fund managers pay to build.

Now if only we had a product that diversified our investment dollars really well, without us having to pay for someone’s yacht… oh wait, that’s exactly what we’re talking about – Exchange Traded Funds! These efficient little money makers often charge less than .40% (the average MER of my portfolio is about .20%). Humans just aren’t good stock pickers. Whether you try to do it, or hire a “professional” to do it, the odds just aren’t in your favour unless you are multi-millionaire and are well-connected within the investment world. To make matters even worse for the mutual fund crowd, most managers’ high rate of trading results in an overall product that is less tax efficient than ETF investing as well. The raw numbers are just too convincing to ignore.

The Really Crazy Part Is That Many Mutual Funds Look Just Like ETFs!

Here is where I’m really going to blow your mind. Many of the most popular mutual funds on the market - funds that have billions of dollars in

Hedge Funds




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$

RBC Canadian Equity Fund – MER 2.05%

Royal Bank of Canada – 5.09%TD Bank – 4.46%Suncor Energy Inc. – 3.98%Bank of Nova Scotia – 3.36%Potash Corporation – 3.36%Canadian Natural Resources – 3.06%Barrick Gold Corp. – 2.83%Goldcorp – 2.63%Bank of Montreal – 2.26%

TD Canadian Blue Chip Equity – MER2.35%

TD Bank – 8.03Bank of Nova Scotia – 6.56%Canadian Natural Resources – 6.34%Goldcorp – 6.3%Suncor Energy Inc.– 6.27%Enbridge – 4.6%Royal Bank of Canada – 4.43%Barrick Gold Corp. – 4.07%Canadian National Railyway – 3.81%

Ishares TSX60 – MER 0.17%

Royal Bank of Canada – 6.78%TD Bank – 6.22%Bank of Nova Scotia – 5.07%Barrick Gold Corp. – 4.83%Suncor Energy Inc. – 4.48%Goldcorp. – 3.94%Canadian Natural Resources – 3.94%Bank of Montreal – 3.39%Potash Corporation – 3.39%

assets invested in them – essentially copy the ETF in the same sector. This seems ridiculous right? I mean the ETF is put together using a fairly simple formula that just makes sure that the fund gets as close to the market average as possible. Surely these market gurus with all their jet flyin’, trend-settin’, limousine-ridin’ (thank you Rick Flair) ways, must be able to try and pick stocks better than this right?

Well, here are two of the biggest mutual funds in Canada, sold by the two biggest banks in the country, and a run-of-the-mill Canadian ETF. Have a look before we get into any analysis of the situation (all percentages were taken from the December 9th, 2011 edition of the Globe and Mail). Sorry in advance to my American readers, I’m biased to using Canadian examples because they better illustrate my point, and I do hail from the Great White North.

That must be a hard day at the office for those fund managers eh? “Well boys and girls what should we do today… Let’s look for some real game changers here. Let’s get out the ETF that charges people almost nothing to invest in it, and let’s switch numbers 3 and 4 around. Ok, well that was hard, must be about time for a coffee break, come back in 20 and we’ll brainstorm if we should go up or down a hundredth of a percentage point on something.”



ETF INVESTING Low Maintenance & Stellar Returns$Just How Many Yachts Can You Buy With $100 Million Anyway?

Now let’s calculate how much thefinancial industry has made off of all the investors who have put their money into the RBC mutual fund for example.

Keeping in mind of course that their top 9 holdings in their expensive mutual fund are exactly the same as those in the ETF and the order and percentages of the overall fund are even fairly similar. Well, as of December 2011, the RBC Canadian Equity Mutual Fund had approximately $5,163,000,000 of assets.

That little 2.05% MER that seems so tiny and insignificant before… well that little chunk is now worth $105,841,500 annually. Not bad for shuffling a little paper. By comparison, the ETF that has an MER of .17% would have taken $8,777,100. Obviously no one is going hungry over at the ETF office either, but when people are taking money from me, I’d rather have seven figures taken than nine, but that’s just how I roll.

So how does the mutual fund industry get away with these shenanigans? Because we let them! The Financial Post recently released an article that reported, “There is still $773-billion invested in mutual funds, according to the Investment Funds Institute of Canada; the amount in exchange-traded funds is barely 6% of that: $49-billion, according to the Canadian ETF Association.”

If these guys can’t pick stocks any better than most people (the big ones are copying the ETFs anyway) why are we paying for their 12th sports car and 4th house again? I don’t. I never have to worry about what mutual fund I want, or what the market is doing relative to my manager’s preferences or strategy. Thank goodness… as a teacher I have really been noticing my yacht club getting crowded!

http://business.financialpost.com/2011/12/06/mer-debate-mutual-fund-industry-stands-its-ground




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$What ETFs Belong In My PortfolioChapter 6:

The Lazy Man’s Path To Riches Portfolio

Before we get too far into discussing what YOU should have in your portfolio, I thought I’d put myself out there and show everyone my super-basic, couch potato-esque, way to get “rich.”

1) iShares S&P/TSX 60 Index Fund (XIU) –MER 0.17%: 35% of my portfolio

This is the most popular Canadian ETF on the market. It efficiently tracks the 60 largest stocks on the Canadian stock exchange, and the majority

XIU - S&P/TSX 60In...

Vanguard MSCIEmerg...

Vanguard TOtalSloc...

Vanguard Total Inte...

Vanguard Globalex-...

of Canadian mutual funds look exactly like it. Its MER is low, and will probably be pushed even lower as it competes with American offerings. I don’t have to worry about any American-Canadian tax laws with this one, so it goes in my TFSA.

2) Vanguard MSCI Emerging Markets ETF(VWO) – MER .22%: 25% of my portfolio

I believe that the majority of the world’s growth going forward will inevitably in the emerging markets. Remember, I’m looking at a long investing time frame. This American ETF gives me the cheapest access to these markets.

3) Vanguard Total Stock Market ETF (VTI) –MER .07%: 25% of my portfolio

I sometimes think we outsmart ourselves with this whole diversity thing. I mean, realistically, this ETF gives exposure to over three thousand of the USA’s companies. Those companies are themselves diversified all over the world, and depend on consumer bases from one corner of the globe to the other. One could do a lot worse than simply working to gain as much income as possible and just repeatedly buying this ultra-low cost ETF!



ETF INVESTING Low Maintenance & Stellar Returns$4) Vanguard Total International Stock ETF(VXUS) – MER .20%: 10% of my portfolio

This selection has some overlap with my Emerging Markets ETF listed above. I started purchasing it before Europe started to show just how poor things are over there. I haven’t bought this ETF in years, preferring to put international exposure in the hands of emerging markets.

5) Vanguard Global ex-U.S. Real Estate ETF(VNQI) – MER .35%: 5% of my portfolio

My dad always told me, “Son, there is only one thing God isn’t making more of – land, sounds like a pretty good investment to me.” I don’t like the relatively high MER of .35% on this one, but I do like having exposure to properties around the world. People keep telling me our world population is going to hit 9 billion or so by the time I’m in retirement. These people have to live and develop somewhere right? This fund gives me exposure to real estate in more than 30 countries. It’s a relatively small part of my portfolio.

So there it is, my masterpiece. Now I’m sure the very first thing on many of your minds is, “Kyle, why do you have all these American ETFs

in your portfolio? Isn’t that complicated? It doesn’t sound like sitting on a couch to me.” The truth is that I am big on investing in American ETFs right now and here are 3 reasons why:1) The Canadian dollar cannot possibly stayat this equilibrium long-term. Due to our recent economic performance, and the slump the USA has been in, our dollar (CAD) has been artificially high for the last few years. This has meant that for much of my investing life, the Canadian dollar has been at par with the USD. As a history/business teacher I can say with a fair degree of certainty that this can’t be the case for much longer. Canada’s resource-driven economy will fall back to Earth, and the power of the USA machine will come back. These investments allow me to take advantage of this currency movement.

2) The good people over at Questrade makebuying USA ETFs really easy. You purchase them on a stock exchange just like you would any other ETF. Now it’s true that there is a little bit of trickiness involved if you want to do this properly. Questrade allows you to open up an RRSP account with USD in it. This is important since it prevents the need for converting currency back and forth and chewing up much of your hard-earned (ok not really hard-earned in the true sense of the word,






33

$you’re sitting on the couch remember) investment returns. *Teaser Alert* I will likely write to a “how-to” on this topic in the near future.

3) USA ETFs offer such low fees that it isn’teven comparable. I grew up close to the American border and we would marvel at their alcohol prices… now I marvel at their ETF prices… boy, that whole getting old thing happens pretty fast.

ETFs – Have It Your Way (The Lazy Man’s Portfolio brought to you by BK)

With The Lazy Man’s portfolio, my overall MER is less than .20%! Beat that money managers! So how did I arrive at these ETFs? Well, there are 3 steps to building your Low Maintenance & Stellar Returns portfolio. Pretty much any financial advisor (including really cheap ones) or business major can go over these with you.

1) Determine Your Risk Profile.2) What Are Asset Classes and AssetAllocation?3) How Do I Ultimately Choose The BestETFs For Me?

Your Risk Profile

There are hundreds of tests online for determining what your risk profile should look like. In Canada, financial advisors are supposed to have you fill out one of these before you choose any investments at all. They cover basic ground and determine how much risk is appropriate for you in your portfolio. Generally, stocks/equities are considered to be among the riskier investments out there, with bonds and GICs being more conservative. Your experience with investing, your time until planned retirement, income, and a few other factors play in to what type of investments you should feel comfortable with.

Personally, I am a young person in a pretty strong financial situation. I shouldn’t need to withdraw any of this money for 30+ years, so the short-term ups and downs don’t worry me at all. I have a very high risk tolerance, so I don’t currently have any bonds inside my portfolio. This will definitely change as I get older.

Asset Allocation and Asset Classes

Once you figure out just how much risk you should have in your life, you can take two paths. The



ETF INVESTING Low Maintenance & Stellar Returns$first path would require you to do some homework on your own. I have written a couple articles on asset allocation and asset classes, that are a good place to start. There is definitely no shortage of information online concerning these two topics.

This DIY approach requires you to take your risk profile and set up an investment portfolio that reflects your appetite for risk, and your investment timeline. The second path is to hire a financial advisor that will only charge you a flat rate (none of those pesky mutual fund commissions needed thank you very much) to set up a plan for you that reflects your risk profile. This is often a good idea, but I am a proponent of path one because it forces investors to take responsibility for their own financial future and become financially literate (wow, did that sound like a teacher or what?).

The basic asset classes that most people will deal with are stocks, bonds, and money-instruments (such as GICs and T-Bills etc). You can make this as complicated as you want, but the basic idea is that stocks have the most risk, and have historically had the best investment returns. Bonds can range from pretty risky (companies that aren’t that solid produce bonds called “junk bonds”) to extremely solid (bonds of major countries for example). Money instruments have traditionally

been considered to be the least risky, and also produce fairly small returns. There are numerous other asset classes like commodities and real estate, but this is another topic for another day.

What ETFs Should I Look For

You’re almost there. You know what amount of risk will let you sleep at night, yet live comfortable when you quit punching the clock, and you’ve determined what mix of stocks, bonds, and other stuff reflects that risk level. All you need to do is find yourself some ETFs and you’re ready to set the cruise control.

Here is what I take into account when looking at ETFs:

i) They need to be simple enough for me to easilyunderstand where my money is going (double leverage inverse gold bullion ETFs need not apply).

ii) They need to have very low fees. There aretoo many good options out there to pay any more than .50%, and even that makes me suspicious.

iii) You need to be aware of what the tax situationand foreign currency rules are if you’re going to

http://myuniversitymoney.com/investing-series-asset-classes/

http://myuniversitymoney.com/investing-series-asset-classes/




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$invest in ETFs outside of your home country.

iv) When I started ETF investing, a good initialsource of information was to look at the biggest ETFs on the market (in terms of dollars invested). There is a reason why these ETFs have a lot of demand. They are usually cheap and easy to understand.

The “Where I Want To Be 30 Years From Now” Portfolio

My portfolio is obviously a pretty good indication of where I want to be today (just with more units of each fund ideally), but that doesn’t tell many of you anything about your situation. The truth is that every situation is different, but as a general rule of thumb, the more you might need to take your investments out, the less you should have in high-risk assets like equities; therefore, the closer you get to retirement for example, the more money you should keep nice and safe in bonds and money instruments. Here is a snapshot of what I would advise for a 50-55 year old person who has all their debt paid off and is looking at retirement:

XIU - S&P/TSX 60In...

Vanguard MSCIEmerg...

Vanguard TOtalSloc...

Vanguard Total Inte...

Vanguard Globalex-...

The “30 Years From Now” Portfolio

1) DEX Universe Bond Index Fund (XBB) –MER .30%: 15% of my portfolio

Can’t go wrong with this ultra-safe bond index that holds Canadian Federal Government debt, and the debt of several Canadian provinces. It’s Canada’s most popular bond ETF (although I’m not crazy about that MER, hopefully it will decrease in the 10 years or so before I begin adding it to my portfolio). It’s also much easier than holding the underlying bond asset, and much more liquid in case I ever needed the money sooner rather than later.



ETF INVESTING Low Maintenance & Stellar Returns$2) Vanguard Total Bond Market ETF (BND) –MER .11%: 25% of my portfolio

This is the perfect way for me to track the greater bond market. It has a little more risk than my purely Canadian government bond ETF, but with exposure to over 3,000 separate bonds (all U.S. investment-grade or higher) in one fell swoop, all for the bargain price MER of .11%, I’m definitely in. Great tool to diversify your overall portfolio if you want less risk.

3) iShares S&P/TSX 60 Index Fund (XIU) –MER 0.17%: 20% of my portfolio.

4) Vanguard Total Stock Market ETF (VTI) –MER .07%: 20% of my portfolio

5) Vanguard Total International Stock ETF(VXUS) – MER .10%: 15% of my portfolio

6) Vanguard Global ex-U.S. Real Estate ETF(VNQI) – MER .35%: 5% of my portfolio

With life expectancies going up, I have reason to hope that I may depend on my investment income for quite a few years while in retirement. For this reason, I still have quite a bit of risk in this portfolio relative to what many people advise. As

Europe comes back online and emerging markets begin to level out, I’m sure I’ll go back to the simplicity of the Total International Stock ETF. The investment studies that I have read all come to the same investing conclusion anyway – for the vast majority of investors, picking the exact right ETF doesn’t matter nearly as much as saving as much as possible, diversifying across asset classes and geographical locations, and just staying the course instead of allowing fees eat up your returns.

Einstein was famous for saying,

Ok, so he was famous for stuff like inventing quantum physics and the atom bomb, but he really did say that stuff about compound interest. Just set your asset allocation plan up, focus on savings rates, and let compound interest do its magic.

“Compound interest is the most powerful force in the universe.” -Einstein




37

$Exotic ETFsChapter 7:

If you’ve glanced at financial magazines over the past few years (they’re in the dentist's office waiting room and stuff ok!) you have no doubt seen advertisements for this or that special ETF that can do all kinds of great things.

Here is the reality of the situation, many people like myself have fallen hard for ETF investing, and marketers are not blind to this.

So now we have all these financial instruments coming out of the woodwork that call themselves “ETFs” but they do not at all represent what ETFs were created to be, or how they should be used. People have started marketing proposals such asE TF trading strategies, and how to beat taxes with ETFs, and all kinds of crazy stuff. I like to Keep It Simple and Stellar by watching my money grow without shooting myself in the foot like so many investors do! I don’t advise investing in the vast majority of these ETF options for people, but they exist because there is a demand for them. Just make sure you do your homework and understand what you’re getting into before

throwing 50% of your portfolio into the newest progeny of financial engineering to hit the market.

Actively Managed ETFs

These actually kind of piss me off. Here I’m trying to explain to people why ETFs are so much better than mutual funds, and you go ahead and change the name of mutual fund into “Actively Managed ETF.” The idea of someone managing money inside an ETF is oxymoronic! You’re buying an ETF to get away from people who think they can beat the market and want to get paid while everyone watches them fail. These actively managed ETFs all have high MERs and are just another way for people to try and take money from you. I recommend staying away from these at all costs.

ETFs That Track Specific Groups

As I mentioned above, you can get ETFs to track anything these days. You want to invest in China, European banks, sector rotation strategies, clean energy, commodities or almost anything else, we have an app ETF for that. I don’t see the real need for getting into these, but again, I must admit that people have made money with them. I prefer to sit back and focus on the broad big picture, and



ETF INVESTING Low Maintenance & Stellar Returns$not try to predict too much. If people that get paid millions to do this can’t do it very well, I don’t want to bet on myself.

Inverse ETFs

We are so creative as an easy money-obsessed species, that not only can you bet on nearly anything with ETFs, you can actually bet against most things as well. Don’t like the way gold is looking? Simply buy an inverse gold ETF. You predicted the meltdown of the Eurozone? No need to get fancy trading options, simply use inverse ETFs.

Leveraged ETFs

If you think silver is going to rise, why be a wussy and only invest in a boring old silver ETF with a low MER? Be a real man and double down on your bet, or even show you’re a tough guy by going with a 3x leveraged ETF. The idea behind a leveraged ETF is that when you invest in one, they take your original money and borrow 1-2x as much again, and then invest that money as well. The end result is that if silver was to go up, you would see your original investments gain twice as much as an investor with regular ETFs; however,

if silver loses money – you guessed it, you now lose twice as much money as your boring buddy with the simple silver ETF. Overall, these are a speciality product meant for a very small group of people. Their MERs are high because they have to pay the financing costs to create the product, and the increased volatility means that these ETFs can be very risky.

Not My Style

While I have done a substantial amount of reading on exotic ETFs, and could provide a more in-depth look at certain ETFs if there is a demand for it, I personally feel there is no need for the vast majority of them. They are creative little niches made by financial companies to give them an excuse for a high MER and consequently, a very profitable way to make money without much work. I’ll stick to my quest to allow my investments to meet the market average, and watch my dollars compound nicely, thank you very much.




39

$Potential Drawbacks of ETF Investing and How To Minimize Them

Chapter 8:

Of course I wait until the end to tell you guys about all the bad stuff that goes with ETF investing right? Honestly, as long as you Keep It Simple and Stellar you should have very few problems. The main negatives that I have seen for people in ETF investing are:

1) Transaction fees eating up smallportfolio returns.2) Paying too much attention to ETF tradingstrategies.3) Making things more complicated thanthey have to be, and over-diversifying.

Those Pesky Fees Are Back Again?

“But Kyle, you said that ETFs were good with fees didn’t you?” Well, yes, kind of. Ok, here’s the deal. Every time you buy or sell a stock or an ETF it costs money. If you are using a full-service brokerage from one of the major banks, this can cost you $25-$30 per trade. If you want to invest monthly, your $100 contribution is going to automatically

have 30% eaten up by your transaction fees! This is catastrophic for your long-term returns. Luckily you aren’t going to do this because you’re going to keep it simple.

Your first step is looking into opening an account at Questrade if you are Canuck, and at Trade King or Options House if you’re an American. These places have great customer service reputations, and even more importantly, it will only cost you $4.95 per trade. The even better news, is that there are now many ETFs that discount brokerages will allow you to buy and sell without paying any transactional fees at all!

My bet is that soon all major brokerages will be forced to offer many ETFs for very minimal transaction fees in order to stay competitive. This used to be the point that every mutual fund salesman commission-based financial advisor would hammer on – mutual funds had no extra transactional costs (meaning you could invest


http://youngandthrifty.ca/recommends/ebook-tradeking

http://youngandthrifty.ca/recommends/ebook-optionshouse


http://youngandthrifty.ca/recommends/ebook-questrade-free-etfs


ETF INVESTING Low Maintenance & Stellar Returns$small amounts of money every month for no extra fees). This advantage is already mostly erased, and will likely soon be gone entirely.

KEEP IT SIMPLE!

I know I sound like a broken record, but it’s amazing how low the returns are for the average investor relative to the market averages. Remember, it isn’t entirely your fault, human instinct is working against you doing this whole investment thing correctly. Don’t try to flip from one ETF to another, constantly buying the latest offering that attempts to, “Track the market for selling ipods in Bangladesh” or something like that. Very, very few people ever win at this game. Do yourself a favour and go do something you enjoy instead of worrying about it.

You Can Have Too Much Diversity?

As I commented when discussing my own portfolio, I have two stocks that have quite a lot of overlap when it comes to what they actually invest in. The companies that are owned within a mutual fund or ETF are commonly referred to as holdings. The mutual fund industry was famous for trying to tell people they needed 17 different mutual funds in order to

diversify their money, and then when an investor actually looked at what their money was invested in, it was the same companies over and over again. What you can quickly end up with when dealing with mutual funds or ETFs is an overly-complicated portfolio that is not at its most efficient in terms of low fees, and is just plain bulky and irritating to maintain.

When you honestly look at it logically, these mega-conglomerate companies are already pretty diverse. The Royal Bank of Canada, Wal-Mart, 3M, Coca-Cola, and Berkshire Hathaway, are all examples of companies that create and sell products and/or services all over the world. Just by owning one of them you’re eggs are in many different baskets. By owning one ETF full of them, you’re pretty diversified. Owning 9 ETFs that all own different percentages of these companies does not diversify your investments any more than owning the one did.

I cannot stress enough how easy on yourself you can make this by just saying, “Over a long time horizon I will beat 97-99% of mutual fund managers by not doing much at all,” and then not looking at much besides the very basic ETFs.




41

$Getting Started With ETFs In 99 Minutes or Less… and How To Finish

Chapter 9:

As we begin to reach the end of my eBook, I worry if I have left something out, or perhaps bombarded you with too much information. There is no doubt I have much more left to say (whether you want to read it or not is another story altogether). I love ETF

investing for the simplicity and ease of it. I honestly believe that anyone can use these strategies and enjoy stellar returns. The real beauty of this stuff is that you don’t have to be a Warren Buffett or a Bill Gates to figure it out.

I’m considering releasing a monthly or quarterly newsletter talking about the latest happenings in ETF Investing, as well as going into more specific detail on certain ways to execute the basic strategies I prefer.

I also hope that this eBook doesn’t totally crush my dreams of producing something that people find useful. If that is the case, I would like to do

another eBook in the near future. Some examples of future topics would include:

• A full comparison of discount brokerages vsfull service brokerages and which one is rightfor you.

• A Canadian-specific eBook aimed at clarifyinghow to best hold USA-based ETFs in yourportfolio.

• ETF investment strategies for moreexperienced investors.

• How to do the quarterly maintenance (all15 minutes worth) on your couch potatoportfolio.

• What new ETFs are being offered, andwhat effects competition might have on thecurrent favourites (especially in regards tolower MERs).

• Where to find the lowest transactionfees (hopefully as low as 0) for your ETFpurchases.






All Good Things Must Come To An End

If you’re still reading at this point you obviously didn’t completely disregard my first attempt at producing an eBook. I feel that I competently promoted an investing path that anyone can navigate, and I tried my best not to put you asleep along the way.

Absolutely any feedback you wish to give me can be sent to [email protected].

• What are bond ETFs and how do they work?

• What is the difference between the variouscommodity ETFs?

Thanks for checking out my eBook and I hope you found it useful and comprehensive!


mailto:youngandthrifty.ca



43

$

Barras, Larent & Olivier Scaillet, & Russ Wermers. False Discoveries In Mutual Fund Performance: Measuring Luck In Estimating Alphas, 2005.

Bogle, John. Common Sense On Mutual funds: New Imperatives For the Intelligent Investor, 1999.

Chevreau, Jonathon.MER debate: Mutual fund industry stands its ground Dec. 6, 2011.

Chilton, David. The Wealthy Barber Returns. Kitchener, Ont: FAC, 2011. Print.

Fama, Eugene. Efficient Market Theory. University of Chicago Booth School of Business. 1960.

Globe and Mail, Dec.9, 2011

Google Images

Malkiel, Burton. A Random Walk Down Wall Street. Reed Business Information Inc, 1996.

Morningstar study, 2010,

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