I read a lot of finance blogs. Like, a lot. You might say I’m a finance blog junkie. I need my fix, each and every day. I’m half expecting all my friends and family to show up at my house and have an intervention, in an attempt to get my love of finance blogs under control.
Until that happens, let’s talk about a weakness I’ve found in a lot of finance blogs. They’re great at giving advice on stuff like frugality, extra income, budgets and emergency funds, but most lack in the area of investments.
The stock market is, at first glance, an intimidating place. As an active participant, I can tell you that it can be incredibly complicated. But, the good news for everyone reading is that products exist that make investing incredibly easy. In fact, I can tell you how you can outperform most investors, all while only spending 5 minutes a year on your investments. Yes, it really is possible. And, I can explain how to do it in just a short blog post. Let’s go.
The first thing you’re going to want to do is figure out what percentage of your portfolio you want in stocks and what percentage you want in bonds. There’s a simple rule, all you do is subtract your age from 100, and that’s the percentage of your portfolio that should be in bonds. Since I’m pretty much 30 now (so old!) I would have 70% of my portfolio in stocks and 30% in bonds.
Considering that I’m a Canadian writer, (eh) I’m going to focus the rest of the post on Canadian products and from a Canadian perspective. If any Americans have questions about specific products, I’ll answer them in the comments.
What To Buy?
Depending on how much money you have, you’ll either want to use mutual funds or exchange traded funds. Let’s start with mutual funds.
Most Canadian mutual funds have high fees, which all but guarantee that these funds will lag the market. You’ll want to avoid just about all of them, with the exception of mutual funds from TD Bank, called E-Series funds. These funds allow you to begin investing with just $100, with subsequent investments of $100 at a time required.
Let’s assume I’m starting a new account with TD. Remembering I’d want 30% of my portfolio in bonds, I’d use the following breakdown:
30% – Canadian Bond Index
25% – Canadian Stock Index
25% – U.S. Stock Index
20% – International Stock Index
This portfolio offers exposure to stock markets both in North America and the rest of the world. It’s simple, and anyone can set it up in just a few minutes, once they actually open up the account with TD.
After a year, some of the stocks will do better than the other ones. All you need to do each year is have a look at your asset allocation, and only make a change if one sector moves by at least 5%. If bonds become 35% of your portfolio after a year, then you’ll want to contribute 25% of next year’s contribution towards them. You’ll then take the extra 5% and add it to whatever performed the worst, since we’re all told to buy low and whatnot.
Exchange Traded Funds
If you’ve got more than a few hundred dollars to invest at a time, you’ll want to use exchange traded funds (ETFs) to accomplish pretty much the same thing we did above. Instead of using TD products like a trading ISA, we’re going to look at ETFs issued by a company called Ishares. These are traded on the stock exchange, are the biggest ETF family in Canada, and are the most liquid. (meaning there’s more shares traded each day, making it easier to buy and sell)
Buying ETFs online is a cinch. You just input the ticker symbol into the webpage, the number of shares you’d like, and what price you’re willing to pay, which is usually the market price. The whole process takes but a minute.
How would my portfolio look using iShares ETFs? Pretty much the same as the TD one.
30% – Canadian Universal Bond Index (Ticker symbol XBB)
25% – TSX Composite Index Fund (Ticker symbol XIC)
25% – S&P 500 Index Fund (Ticker symbol XSP)
20% – MSCI International Index Fund (Ticker symbol XIN)
As with the TD funds, rebalancing is as simple as just buying more of the worst performing fund once a year.
It’s Really That Simple
For Canadian investors, this is all you need to know to build a solid, diversified portfolio. Since these products are among the lowest cost ways to invest, that means more dollars in your pocket and less for the fund companies.
Can you spare 5 minutes a year to become a good investor? That wasn’t so bad, now was it?
This post was written by Nelson.
I’m not sure if as many people who own the personal finance blogs that you are are as passionate about investing as the other topics that you mention. I also suspect that fact that it takes a lot of time (or a lot of money) before people feel like they are making real traction with their paper portfolios is relevant to the lack of focus too.
Investing every bit as important as frugality and other money tips if you’re serious about becoming wealthy. Investing is hard and complicated, while frugality isn’t, which is why most blogs don’t really touch on it. I just wanted to point out it really isn’t that complicated.
It takes me quite a bit longer than 5 minutes to check asset allocation and rebalance – but then we have more than just index funds.
Investing can certainly get much more complicated than what I spelled out above. It was more of a primer for somebody who has no idea about the topic.
I should probably spare this 5 minutes a little more often, but I think I’m always just making things more complicated than they need to be when it comes to investing.
Lots of people do the same.
Do Canadian bonds offer tax advantages to Canadians over US T-bonds? If so, this method is fine in that it should slightly outperform the market and more noticably outperform most investors. If taxes are the same for all government bonds I would swap the igloo bonds ( 🙂 ) for T-bonds (or possibly Japanese Govt. bonds or swiss bonds again depending on tax) because it will smooth out performance in a financial crisis – when money flees to a safe haven, that’s where it goes first which will offset the bleeding on the stock side.
Canadian bonds would offer no tax advantages compared to US bonds. But, currency fluctuations would probably cancel out those gains investors would make on those so called “safe haven” countries. Besides, Canadian government bonds will typically react the same way as those other ones during times of economic instability.
I’m still scared of investing and don’t feel 100% confident writing about it but like Jeffrey probably making it more complicated than it really is! I should take your advice though b/c it doesn’t seem as painful when you put it that way 🙂
I tried to make it really simple. Hopefully I succeeded.
Not sure how IShares costs compare to other ETFs in Canada, but in the US it’s definitely not one of the cheaper fund families. I’d recommend shopping around for the lower costs ETFs.
Oh and you got the math right but the equation wrong, it should be your age in bonds or subtract your age from 100, and that’s the percentage of your portfolio that should be in Stocks.
Vanguard is in Canada, but the offerings are pretty slim. We’re stuck with Ishares for now, anyway. Online brokers are starting to offer certain ETF trades for free, which helps.
And yeah, I got the formula wrong. In my defense, I am a moron.
My blog is admittedly sparse in this area. Because I know next to nothing about it. I’m learning a bit daily, though via posts like this and others in the PF world! Thanks a ton!
You gotta start somewhere.
For some reason, I expected you to be more aggressive in your stock buying (e.g., I’ve also seen the formula you use above being either 110 or even 120 minus your age being the “correct” amount to invest in stocks).
Feel free to be that aggressive if you want. I was erring on the conservative side.
I like this sort of 101 post…it’s a great way to help people get over the fear of investing. 5 minutes….we all know THAT’s a slippery slope….
Investing isn’t so scary.
I’m a very lazy investor so I already use a well diversified index portfolio to own the stock market. It takes me about 10 minutes to re balance my portfolio every year.
10 minutes? You’re wasting so much time!
Being that I was an investment banker in my previous career, I feel that I can add some insight as to why so many bloggers may not cover stocks.
Great post, but 5 minutes? A bit misleading there. In terms of mutual funds, I don’t think that you need the most sophisticated investor to understand how they work or the breakdown of them. What is important to mention here is that every investor has to evaluate their risk tolerance and that is how they can determine what mix to invest in. Not simply what’s doing well that year. Past performance does not guarantee future results and some investors do not have the time horizon to wait it out.
I recently wrote an article on what is a REIT. Sort of touched on investments but not really. I wrote another article “Real Estate or Stocks.” My passion is real estate and so I naturally covered REITs as one of my topics and compared stocks to real estate. Personally, I do not write about only stocks because most of my audience is well versed when it comes to the basics (for example mututal funds) and maybe I should motivate myself to write an article for the sophisticated investor?
I still maintain most readers of this site only need to buy two or three different funds or ETFs, since they don’t have much capital to invest. What’s better, people investing in my simple portfolio or being paralyzed in fear?
For someone investing like $250 a month, simplicity is best. If their asset allocation isn’t perfect, they’ll lose what, $43? Getting people investing is much more important than getting the asset allocation perfect.
Index investing is certainly a viable strategy. Much better than the high-fee mutual-fund investing.
Still, I try to keep my indexes to a minimum. I use them in my retirement accounts and for international exposure, but other than that, I’d prefer to own individual stocks. I have little interest in handing over my voting rights to the index fund manager (as they usually vote the shares in ways I consider to be rather poor).
Index investing is particularly useful for those who are starting out or who want a hands-off approach.
We index invest using TD’s web broker. We pay very little management fees. My hubby is not a fan of stock investing. I have tried to convince him to try it out. I think once we have a bigger investing base going he will be more open to it but right now we are focusing on diversification which is easiest with index funds.