Making investing accessible for everyone
It’s becoming easier and easier to invest in the stock market. Once the financial playground for the wealthy and connected, the stock market is now open to everyone with some savings to invest.
A few important developments have made this possible. The growth of the mutual fund industry opened the door for people with smaller amounts of money to get into the stock market. Then, the emergence of online trading in the 1990s provided a new channel for people to get invested, one that didn’t require a stock broker or a financial advisor. More recently, exchange-traded funds, or ETFs, have further advanced the accessibility of the stock market, and at a lower cost than mutual funds.
ETFs have solved two main problems that most regular people have when buying stocks: picking the right ones and having enough money to own a bunch of them. Mutual funds do this too, but ETFs do it in a much cheaper way.
How ETFs make investing easy
ETFs, are in my view the easiest and most sensible option for most investors, especially for new investors looking to manage their own money. Why? Instant diversification and no stock picking.
ETFs solve the diversification problem. When you buy a unit of an ETF, you get exposure to hundreds or even thousands of stocks. So even if you only have $100, you get this extensive exposure. It would be impossible for most people to get enough diversification to invest across the world by buying individual stocks.
You can also avoid having to choose what stocks or sectors to invest in. Traditional ETFs are passively managed, which means they track an index. An index is a list of stocks that represents the bigger market. For example, the S&P 500 is a list of 500 U.S. companies – it’s not a list of all of the companies that trade on U.S. stock exchanges, but it’s a representation. When you buy an ETF that tracks the S&P 500, your investment tracks the performance of these 500 stocks. You don’t have to try and predict which of these 500 stocks will do better than the others, or whether the technology sector will do better than the banks, you just own them all – and that’s good because stock picking is really hard to do.
This chart shows an example of how this works. The blue bar is the S&P 500 index, the orange bar is an ETF that tracks this index, and the grey bar is a mutual fund that invests in U.S. stocks. The mutual fund is actively-managed which means someone is deciding what stocks to own and which to exclude from the fund. You can see that on some days the fund does better than the index and some days it does worse, while the ETF performs the same as the index.
I’ll call upon the world’s most famous investor, Warren Buffet to bolster my point. In his 1996 letter to shareholders, Buffet said:
“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.”
If this was written today, he probably would have said “index funds or ETFs”. The idea is the same.
How to choose
Now, you do of course have to choose which ETFs to invest in. There are hundreds available in Canada, but don’t worry - you only need to look at a small subset of these. This subset consists of ETFs that are passively managed and track a broad market index like the S&P 500, the S&P/TSX Composite, and the MSCI EAFE (Europe, Asia and Far East).
There are more exotic ETFs that track investment themes, like cannabis, sports betting, climate change, and real estate for example. If you want to have some fun, the option is there.
For the rest of us, all we need to do is choose 4-5 funds, buy them, and hold them. Go for the cheap ones. Unlike buying a pair of running shoes for your upcoming marathon, it’s totally okay to buy the cheapest ETF. Cheap doesn’t mean low quality in the ETF world – it usually means the company providing the ETF is big and can afford to charge low fees.
The mega source for ETFs and mutual funds is Morningstar. Morningstar has a huge database of ETFs and you can screen them to find the ones you are looking for. I find, though, that the list Morningstar spits out is overwhelming. Instead, you can check out recommendation lists, like the MoneySense ETF All Star List, where a panel of experts decide on which ETFs they like best. It’s an easy and reliable way to find the best ones.
How to buy
The last piece of the puzzle is actually buying the ETFs. This is a frustrating thing about ETFs: they are only available through an online broker like QuestTrade, TD Direct Investing (or any bank), or WealthSimple. (Some financial advisors will also sell them.) You can’t buy them in a bank branch and many advisors don’t offer them. You’ll need to open an account and place your own trades. It’s not hard but it does take a little effort to get up and running. Once you are set up, though, and have your ETFs in place, your portfolio will be very low maintenance, cheap and super simple to manage.
Investing for yourself with ETFs is achievable for many people. It just takes some time and learning to get set up. I can teach you all you need to know to get going with my one-on-one coaching. See the Services page on my website to learn more.