Living within your means, frugality, paying off debt; Jay your so boring! Okay I get it. Let’s talk about something a little more intriguing now: Investing. By the end of this post, you’ll be ready to start. With no minimum investment, you can set up an automatic monthly withdrawal from your chequing into a workshop where your money hangs out and makes more money like Santa’s elves making toys.

But first, let me ask you a quick question. Could you please tell me, what’s going on in the stock market?

If you answered “I don’t know, and I don’t care.” That’s perfect! Your ready to invest.

wtf!?

Not following? Well pay attention. This strategy that will have you investing your squid in the stock market with minimal time and energy on your part. You don’t even have to have follow the stock market at all. You’ll hold the title of an investor, and when someone asks you what’s going on in the market you can say with pride:

“I haven’t got the slightest clue; I could care less!”

Actually, the less you know is sometimes sought as more of a benefit for psychological reasons. How about that? The inexperienced can come out on top. How much do you think that’d piss off your aggressive investing counterparts? Love it.

I’m not going to tell you that you will beat the market, because you won’t; with this strategy you will be matching it. The best part however, is that you will beat out most of the suckers that think they can; all while sitting on your butt instead of fretting over what’s going on in the market. (Do people say butt anymore?)

Let us first ingest a little knowledge on the subject. Allow me to spoon feed you. Here comes the airplane! Vrooom…

What is a stock?

A stock is a sliver of ownership in a company. When you buy shares of a certain company, you own a small part of everything that makes it what it is. Even that desk the cute secretary sits in every day is partially yours. Congratulations your technically part owner of a company or hopefully for your sake, more companies (diversification). Stocks are usually a lot riskier than bonds but yield the potential for more gains. Note the emphasis on potential; they’re not necessarily going to.

What is a bond?

Have you ever had to bum money off of someone? Well that’s similar to what a bond is. An IOU. You lend money to an institution such as a company, or the government. They promise to pay you back in full, with interest. See, now you’re a walking bank! I prefer ‘loan shark’ because of its bad-assery. But with such low-interest and my inability to break legs if my payment is not received; I guess I’m not a very intimidating one.

Bonds offer less risk and are great for lowering volatility of an investment portfolio. Usually high quality businesses can pay you back, and I mean the government can just print more money if they don’t have it available.

How much do you allocate stocks vs. bonds?

A good rule of thumb here is to go by your age. When you’re younger, you are able to take on more risk. So if your 25, your portfolio would be balanced with 25% in bonds, and 75% in stocks. Hoooowever. I read something interesting that Jason Zweig brought up in his Commentary on Chapter 4 of The Intellegent Investor by Benjamin Graham:

“Why should your age determine how much risk you can take? An 89-year-old with $3 million, an ample pension, and a gabble of grandchildren would be foolish to move most of her money into bonds. She already has plenty of income, and her grandchildren (who will eventually inherit her stocks) have decades of investing ahead of them. On the other hand, a 25-year-old who is saving for his wedding and a house down payment would be out of his mind to put all his money in stocks. If the stock market takes an Acapulco high dive, he will have no bond income to confer his downside-or his backside.

What’s more, no matter how young you are, you might suddenly need to yank your money out of stocks not 40 years from now, but 40 minutes from now. Without a whiff of warning, you could lose your job, get divorced, become disabled, or suffer who knows wheat kind of surprise. The unexpected can strike anyone, at any age. Everyone must keep some assets in the riskless haven of cash.”

I must say Mr. Zweig makes a valid point. I follow the age rule, but I also have quite a substantial amount set aside in cash for emergency use.

Diversification

Once we get down to the strategy, this will be easy. But I suppose it’s important I share what diversification is.

I eat a lot of peanut butter sandwiches; almost on the daily. Yes, I have already been told that I am a pretty weird dude. Now if I were REALLY weird and ONLY ate peanut butter sandwiches, then all of the sudden ALL of the peanuts and bread in the world spontaneously vanished; I would die. This is what would happen to all of your funds if you had invested in shares of only one company.

Your thinking right now: Your analogy sucks Jason.

Yes, I know. Sorry, let’s move along.

You wouldn’t want to put all of your shillings into one company. That’s very bad. If the company went bust, so does your funds. So to limit risk and lower volatility, you spread your money amongst various companies, within various sectors (financial services, oil and gas, healthcare, etc.). The same goes with bonds. Diversification is key to limit risk.

World travel

It is also important to hold securities in different markets. What I mean by this is, having some within your own country, as well as other countries. Some markets will do better than others so it’s good to limit risk and potentially gain more by having some shares abroad.

Your money will get to see the world! Bon voyage money!

Now before I get into where your going to invest, It’s important I share something very powerful with you. Not quite as powerful as the Mighty Morphing Power Rangers, but very powerful indeed:

Dollar-Cost Averaging

There’s something very beautiful about setting up monthly contributions to your investment portfolio. It has to do with this term: Dollar-Cost Averaging.

Okay let’s assume you and your friend have $12,000 to invest. Your friend is eager and he’s impatient. The guy can’t sit still for 10 minutes. What’s wrong with him!? Hobbes, Calvins out of control again. Give your head a shake. So your friend takes his $12,000 and purchases some investments. You on the other hand are a little more patient. You’re more like Bhudda chilling under the Bodhi tree. You take $1000 a month and invest, over the duration of a year.

Uh-oh something really bad happened here.

The first month when you both invested, it was at the tip of a bull market; prices were high! The stock market rose to its peak before a bear market appeared around the corner. Now the stocks are on the decline.

Your friend unfortunately bought a lot of shares while the market prices were high. Now his moneys dropping in price and it could take a long time until it gets back to the initial price. You on the other hand only invested $1000 at that time. The best part is now that the stock market is declining, the prices of shares are lower. You continue to buy more and at a much cheaper price. Your investment has more growth potential because you didn’t foolishly spend all your money while prices were high. Your laughing, and consoling your poor hyperactive friend while he wipes tears from his eyes.

Dollar-Cost Averaging is great. When prices are high; your money buys less shares. When they are lower; your money buys more shares. It’s a beautiful thing.

Alright now, let’s get into where your best interests are when starting investing.

Without further ado, allow me to introduce the next best thing since sliced bread.

Index Funds

A quote from the mind of the great Warren Buffett himself:

“Most investors, both institutional and individual, will find that the best way to own common stocks (shares’) is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals.”

How about that. The godfather of investing himself recommends index investing for most investors. I can feel your advisors blood boiling as this article goes on!

Actually if you really want to get them going, tell your advisor your interested in investing in Index funds. Then sit back and listen to all of the sales pitches about why that’s a bad idea, and how their mutual funds can beat the market. (Advisors are actually good people. Just proceed with caution when talking to the ones that gain commissions from selling you products. I respect that they have to make a living; but it’s probably better if you support the fee-only advisors.)

What are index funds?

Take for example the index of a book. That listing of names, places, and topics discussed within its pages. An index fund is quite similar.

An index fund is a type of mutual fund that offers exposure to a variety of securities (stocks and bonds) within a well-known stock or bond index. The mutual fund attempts to track the market index by trying to hold all of the securities within it. Take the S&P/TSX 60 for example. This is a stock market index of 60 large companies listed on the Toronto Stock Exchange (TSX), maintained by the Canadian unit of Standard & Poor’s (S&P) Index committee.

So, what this means is that if you invest in an index fund, you’ll have diversified shares amongst numerous quality businesses. And remember, diversification is more important than wearing fresh, clean underwear on a daily basis.

Passive vs. Actively managed Mutual Funds

Now there are different types of mutual funds. If you go to your local bank and mention you want to invest, they’ll sell you on their actively managed funds.

What’s the difference between their funds (actively managed) and the index funds you want (passively managed)? Well since index funds track an index they don’t take a lot of work. A portfolio manager mimics the index by purchasing holdings of the index it is following.

Actively managed on the other hand have portfolio managers picking and choosing investments in an attempt to beat the market. This takes a lot of in-depth analysis and more work for them to play stocks and bonds with your money. The big difference from this is that you should be concerned with is:

Fees

This is a huge reason why index investing better than investing in actively managed mutual funds. Here in Canada we pay some of the largest management fees. With MER (Management Expense Ratio) rates around 2.5%, you will be paying Joe Portfolio Manager and his colleagues A LOT over time in hopes that they can beat the market.

I don’t know Joe Portfolio Manager, but I can say that I don’t like him, or giving him my money to gamble with. I’d rather pay a lot less knowing that I will match the market, winning in the long run; it is actually rare for people to beat the market for consecutive years.

Think of the weather man. A professional meteorologist with all of the tools and knowledge to predict weather patterns. Is that guy right all of the time? Ha! No. Neither is your Mutual Fund Manager. Both still get paid whether they are right or wrong. Ditch him and his expensive fees.

Your Ready To Invest

Now that you’ve taken in all of this information, I think that it’s time to tell you where you can get started.

But wait!

I forgot about one crucial point. What is your outlook on investing? How long do you want to contribute for before you withdraw funds?

If you said 1 year go home. Okay maybe you are at home, but go home even farther! If you want to withdraw funds within 5 years just keep it in something more liquid like your high-interest savings account, or cash within your TFSAs.

The best practice when investing is to buy and hold for long-term. Think 10 years or more. The market is all over the place and it’s best to have a broad horizon in view when investing. This also unlocks the power of compound interest.

Again friends, think long-term.

My 2 recommendations

We’ve finally made it! Here’s what you’ve anxiously been waiting for. In Canada, we have a few options. I’m only going to cover the two that are the best options IMHO. The reason being is this: I know what I’m talking about and you should listen to me.

Okay, I kid I kid! I’m always learning just like everyone else. In my travels however, I discovered this:

The first option I will share is the cheapest option we have available for index funds in Canada. It takes a little more work on your end though. You will have to rebalance your portfolio on your own. The second option is a little more pricey, but it is truly the laziest option you have available. You will not have to do any rebalancing, it is all done for you. Easy street right?

Woah, suddenly something clicked in my brain there! (that doesn’t happen too often) The name of the portfolios are Streetwise Funds. Easy street? Eh? EHHH?

Okay shut up and move along already…

TD e-Series Index Funds

These are the best bang for your buck. As of writing these are the cheapest funds available. It’s a bit more work involved to get started, and you will have to rebalance your portfolio (Benjamin Graham in The Intellegent Investor recommends rebalancing no less than 6 months, and no longer than annually). This means you’ll have to re-evaluate your allocations, buying and selling in order to bring your funds back to your set percentages. So when the time comes, it takes a little work to set them straight.

You don’t have to have an account with TD; however you will have to go in to TD Canada Trust and open a direct investing account. To set up automatic investing you will need to bring in a void cheque from your current banking institution. It takes about an hour to get all set up. These are the funds I recommend:

td-e-series-index-funds

Now for portfolio allocations I recommend roughly your age into bonds, and the rest divided equally amongst the others.

So based on this rule; if you’re 25, quite simply you will have 25% in the Canadian Bond Market Index, and 25% amongst the rest. If your 40, you would have 30-40% in the Canadian Bond Market Index, and 15-20% spread out amongst the stock indexes.

But remember what Zweig said about the age rule. Take that into consideration okay? Okay.

Tangerine Streetwise Portfolios

These are the cream of the crop for the novice (or laziest) investor. You have to set up a bank account with Tangerine (I’d highly recommend it anyways, these guys are soooo awesome! Use my orange key for some free money! Yes, I do get perks for referrals, as will you if you open a no-fee banking account with them and tell your friends. Just check em out anyways, and much appreciated if you use my key!).

tangerine-orange-key

Alright after my brief opportunity to share some advertising with you guys, let’s get back on topic. It’s super easy to set up their funds. Once you have an account with Tangerine you can easily start your automatic contributions online with no minimum investment. You will have to fill out a risk assessment that will recommend a fund based on your answers. After that you can set up where you will be contributing, and your ready to go. Easier than putting your t-shirt on in the morning. Decent.

Their funds are a little more costly, at 1.07% MER but here’s the thing. No rebalancing required. Tangerine takes care of it. So you just set it up with automatic withdrawal from your account. Easy money. Here’s what they have available, and how the funds are allocated:

tangerine-streetwise-portfolio

Notice the bold 0% on bonds in the Equity Growth portfolio. It’s a lot riskier than the others, but with potential for higher reward. Warren Buffet talks so highly about Benjamin Grahams book; I’ve mentioned a few times already but here it is again, The Intellegent Investor. Ben-jammin advises to invest in no less that 25% bonds. Good enough for me! I’m just a guy that eats too many peanut butter sammies. If an investor-genius tells me this rule I shall follow.

I’ll leave that up to you to decide.

What if I want to gamble a little?

Oh so this wasn’t enough? Well if your feeling greedy and you want to pick and choose your own stocks walk with caution my friend. The aggressive investor should be a passionate one who spends hours a week analyzing stocks and researching businesses in and out. It is said that it’s best to invest in what you know and use everyday, but that alone won’t save your butt (Ha! I said it again) from losing all your hard-earned money. Do your research and know the headaches your up against. I’d recommend reading The Intellegent Investor by Benjamin Graham (yet another reference) before you take a stroll through that park. It’s a dark and dreary one, and if you’re not careful it will swallow you whole!

While it can be exciting to go for a bigger reward it’s no easy task. I’m not going to get into it because it’s a whole new ball game altogether. This is a post for the defensive investor. That’s how I roll, and remember what the Buff man himself said.

“Most investors, both institutional and individual, will find that the best way to own common stocks (shares’) is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals.”

Focus on investing wisely and if you want to try your hand at a more aggressive approach, I’d recommend the 10% rule. While 90% of your funds go towards index funds, take 10% and gamble with it. Again pal, know what you’re getting into…

What if the stock market crashes!?

I almost forgot one thing. If the stock market crashes, I should mention where I will be; Doing some awfully terrible dance moves in my living room to celebrate!

Okay maybe that’s a little dramatic.

Remember guys, you’re hoping to buy low and sell high. Well actually it’s best to buy and hold, but again, its best when the prices are low. If the stock market crashes, I’ll personally be selling bonds and scraping up spare change to buy up as many shares as I can. A bear market is not going to last forever, and when pessimists are eager to sell, the optimist can really get ahead. Don’t be fearful. If your young, celebrate. If your older well I guess you won’t be having fun if your planning on selling your funds soon.

Conclusion

I hope all of this information was enough to get you started. It was awfully lengthy and I apologize if your angry I made you read so many words. But there’s a lot to take in! I think I did a pretty good job of setting the foundation. Remember: Invest in low-cost Index Funds, set up automatic contributions (dollar-cost average), diversify your portfolio between different markets, and include bonds to lower risk; also avoid the guys screaming and yelling at each other on the stock exchange. So much noise! Just kick back and enjoy life knowing that you’re investing for your future wisely. Nuff said.

Wait! What about those things called ETFs?

Oh sorry that’s all the time I have for today. (We can go over those later, but for now this is a great place for you to start.)

 

Later days

-Jason

 

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