ETF of Index Fund? Which one should I buy?

ETFs or Mutual funds?

A regular investor has four investment vehicles.

  1. Bonds. I don’t recommend bonds because on the long run they always under-perform stocks.
  2. Single stocks. I don’t recommend single stocks because you have two risks; the stock risk ( lower profits, corporate scandals, etc. ) and the market risk (this risk can not be avoided).
  3. Mutual funds. I strongly discourage actively managed funds and equally promote index funds.
  4. Exchange Traded Funds (ETFs). Which are extremely similar to index funds, except on the way you buy then and sell them.
If you were my sister or my good friend, which one would I recommend to you

Both, ETF and Index funds are in all practical sense the same investment. Let’s say that I am interested in the Toronto-60 (which is an index of the 60 biggest Canadian companies). Both the ETF and the index will have exactly the same 60 companies.

The only difference will be on the way you buy them.

Let’s say I have $10,000. If I want to buy the ETF, I would go to my broker account, let’s say at 11:00 am. See what’s the price, imagine the price is $25/shr, and buy 400 shares. Most brokers charge $10 commission, so the total cost of my 400 shares would be $10,010.

If I want to buy the index fund. Most likely I will not have to pay a $10 commission, but my order to buy can only be executed at the end of the trading day. Let’s say that at 4:00 pm the stock closed at $25.05 then my transaction would cost me $10,020. On the other hand, they could had closed lower, let’s $24.90 and at this lower price, I could have saved a few dollars.

The bottom line is that with ETFs you have a bit more control over the purchase price than with index funds. But on the whole scheme of things, if you are investing long term, If you are planning to add this investment in your TFSA for many years, this little discrepancy should make no difference one way or another.

Buy this one if you have no money

However, let’s say you are my little sister, and you don’t have $10,000 just sitting in your checking account but could put $200 every month. In this case, an index fund would be the overwhelming choice. With an index fund, you could just buy $200 every month without paying a commission. The index fund company would even allow you to buy fractions of a share. Let’s say that after the first month, the price went up to $25.15. You could buy 7.95 shares.

To summarize, If you have a chunk of cash and you are planning to invest for a long time, it doesn’t make any difference if you invest in mutual funds or ETFs ( for the record, I prefer ETF ). But if you don’t have that much cash but you are willing to make periodic small purchases, then index fund would be the way to go.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

Window dressing, mutual fund lying to their clients

Window dressing, spending time with friends
Hanging out with friends

We window dress in our lives all the time. When people post pictures in Facebook, they post the happy moments, they are displaying their best smile. We don’t see how they look in between each one of those photos.

Mutual funds company are supposed to report their holdings at the end of each quarter. This is when they show us their best picture, However, This report does not reflect the holding the fund held during the previous 89 days. By the time a client reads the prospectus the fund could have a totally different portfolio. In short, as a mutual fund investor, you will never know for sure which equities you have in your portfolio.

What is Window Dressing

In order to show the best face for the public, many funds engage in the practice of window dressing, this means that right before the quarterly report they get rid of losing stocks and buy the best-performing stocks in the market.

Imagine a fund that trades in the technology sector. Imagine that Google went up 20% while Apple went down 15%. What the fund would do is to buy Google and sell Apple. That way, when the investors get the report, they will believe that fund manager was able to choose the rising stars and drop the dogs. But it’s not true, it’s all make believe.

Since there is a lack of transparency in the mutual fund industry, managers also get away with buying stocks which are outside of their mandate. For example. Imagine a mutual which claims to invest exclusively in big companies. Well, this mutual fund has an 89-day window to buy stocks in small companies and then get rid of them before the next report.

What are the problems with Window Dressing

The biggest problem is the lack of transparency. The investor deserves to know which stocks he owns at all times. What if he doesn’t like to have stocks which deal with arms, tobacco or alcohol? Doesn’t he deserve to know?

The next problem is worse, I call it buying high and selling low. This is totally the inverse of what an investment should be, but if a portfolio manager buys a stock after it has gone up, to showcase it in his portfolio, he’s buying high. And if he’s getting rid of poor performers because they are an embarrassment for the portfolio, he’s selling low.

The last problem that I see, it the excessive transaction cost. When the fund manager buys and sells stocks simply to showcase them in the portfolio, he is engaging in a lot of transactions. These transactions are expensive and they drive down the performance of the portfolio.

What can you do as an investor

The best thing to do is not to have actively managed funds in your portfolio. Instead, opt for index funds or ETFs. With index funds, you know exactly what you own at all times and in which proportion. For example, when I buy the XIU (iShares S&P/TSX 60 Index Fund) I know that I own the 60 biggest Canadian companies on the Toronto Stock Exchange. There is no mystery to that. I know 365 days a year what I own, I don’t have to wait once a quarter to find out.

I don’t have to worry about excessive transactions and about buying stocks when they are high and selling them when they are low.

Overall, index fund investing has proven to be an investment strategy which is totally transparent, has little or no transaction costs, is 10 times less expensive than actively managed funds and has proven, with time, to outperform 90% of the actively managed funds.

Action steps

Next time you see your financial adviser, ask him about index funds and ETFs.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

Asset Allocation, my opinion and how I do it

Doing a speech evaluation at McGill Toastmasters

Disclaimer: Please be advised that this article represents my opinion only. I am not suggesting you do the same.

Asset allocation

Ever since I got my first finance book, I have been reading about the bond vs stock asset allocation ratio. In theory, the percentage of bonds vs stocks in your portfolio should change every year. The older you get, the bigger the bond ratio should be.

Financial advisors only recommend bonds and stocks because these are the asset classes for which they can get a commission. There are many other asset categories which are completely ignored. For instance, my asset allocation is 50% stocks and 50% real estate.

My stock portfolio is divided as follows: 33% Canadian, 33% US in US dollars and 33% international in either US or Canadian dollars. For the moment I only use ETFs (mostly from Vanguard). I don’t use (and I recommend never using) actively managed mutual funds.

Stocks are as safe as bonds

Financial pundits will tell you that bonds are safer than stocks. But that is not true. Stocks are more volatile than bonds, yes, but not necessarily riskier. Let’s not confuse volatility with safety. At any 30 year time period, stocks has never lost money (in North America) and it have always outperformed bonds. The historic rate of return for bonds is about 2% and the historic rate of return for stocks is about 8%.

It is suggested that, as we age, our bond portion should increase and our stock portion should decrease.

Why would you shoot yourself in the foot

Many advisers, recommend to start adding bonds to your portfolio as early as age 20. Really? A person in their 20s has about 60 more years of life and already a financial adviser is handicapping the growth potential of his portfolio.

Another advice which kills me is to have about 65% of your portfolio in bonds at the time the person retires at 65 years old. Really? A person who made it to 65 could easily live past 90. So for 25 years, the growth will be hampered.

My personal situation

As I mentioned, 50% of my portfolio is in real estate. Eventually, I will sell my real estate and I will be 100% in stocks. I am planning to hold stocks until the day I die. I will not have bonds. The price to pay for reduced volatility is simply too high.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

Financial advisers are double dipping

Hanging out with my friends.

Not too long ago, a friend of mine showed me the statement coming from her financial adviser. It was from a company called R——- Wealth Management.

Immediately I noticed several things.

  1. All the investment were in actively managed mutual funds, with management fees between 2% to 3%. The main reason for these high fees is that mutual fund companies generally give a kick back to the advisor who sells the fund, these kick back is called the Trailer Fee. The fee is generally about 1% of asset. As long as the investor keeps his money in that fund, the advisor will get his kick back every year, even if never speaks to the client ever again.
  2. In addition to the selling funds which generates the greatest kick back for the advisory service, they charge and advisor fee, every month, to the client. This reminds me of the time I got a traffic ticket in which I was charged for the violation plus a service fee for giving me the ticket.
  3. Although my friend went to the advisor with her husband, both of them were sold exactly the same portfolio. The advisor didn’t see them as a couple, but as two different individuals to whom they could sell the same cookie cutter predetermined portfolio.

The example of my friends is not unique. There is hardly any financial institution in Canada who will offer index funds or ETFs. The main reason for this is that index funds and ETFs don’t offer kickbacks to advisors, so advisors have no incentive to offer them to their clients. None of the big banks in Canada will ever offer you index funds or ETFs, they will offer you their branded actively managed funds.

Considering that most actively managed mutual funds charge 2% to 3% fees, here are some ETF that you can use as comparison.

iShares S&P/TSX 60 Index ETF. This fund is composed of the 60 biggest Canadian companies. Their expense ratio is 0.18%. Wow, that is a long way from 2-3%

If you invest in the US. How about this one: The Vanguard Total Stock Market ETF with a expense ratio of 0.05%

The alternatives are numerous, but only by being aware of this abuse you can protect yourself. Stop contributing to your advisor’s retirement and contribute a little bit more to yours.

In life, generally you get what you pay for, but that rule does not apply to investments. In investments, you get to keep what you don’t pay for.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

How to avoid buying new clothes

These are my old shoes. Even after this tear, I think I can use them for a few extra weeks.

I hate buying clothes

I hate spending money on clothes. I don’t know for certain, but I think that I spend about $200 every year. I only buy new clothes when my old ones are all worn down,  tearing apart, have holes or a big stain.

Why people buy new clothes

Generally, people buy clothes because they are bored, because of social pressure, because they want to showcase their wealth, or because they want to compensate for their insecurities.

My friend Elijah, getting the most out of his t-shirt. He is a great drummer so he has no one to impress with his clothes.

Succumbing to social pressure and lack of confidence

One of my ex-girlfriends used to work for a cosmetics company. All her coworkers were always wearing the latest fashion and she felt compelled to keep up with her peers. Every month or so, she would go out and buy something new. She succumbed to social pressure.

A friend of mine, a well-established businesswoman, would never go out of her house without having her nails painted. Is this a sign of confidence?

Mix messages: Spending vs. Frugality

My friend Cheryl. Once a t-shirt is too worn out  to use it in public, she uses it to clean around the house.

At our Toastmasters club, one of our ex-members did a speech about her shopping techniques, how to be fashionable on a budget. The ironic thing is that on the same day, I did a speech on how to be frugal and among many things, how to avoid being seduced by the advertisers and their latest promotions. Our message could not have been more opposite from each other.

Advertisers tell us we are not perfect

Advertisers will make us believe that our bodies are not perfect and that we are ordinary, but if we buy their products, we will become better looking, more confident, and different from everybody else. This is the message, “The rules are not made for you, be unique, buy my product.”

My friend Natalie has been wearing this sweater for 23 years.

Consumers believe these lies and they spend millions of dollars buying new clothes, facial creams, hair products,  etc. And they pay for services such as facials, hair stylist, manicures, etc. All to be unique, we all become unique when we buy the same stuff as everyone else.

Objects will never make us confident

At the end of the day, all the new clothes in the world, all the creams, hair products, etc., will never make you more confident. Instead, you will depend more on them to feel good about yourself.

On the other hand, a person who doesn’t succumb to the social pressures and to the seduction of the advertisers is a person who is, in fact, unique and confident.

If you are reading this blog from your laptop or your smart device, you probably have enough clothes, you don’t need to buy more. Our constant consumption may be good for the economy, but most likely is harming your personal finances, in addition, it’s killing the environment.

My friend Nadal. His jacket has a tear, but he has too much self confidence to let that bother him.

Instead of buying more clothes, I propose to spend your money on experiences, or saving for retirement, or just working less because you have less stuff to buy.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

My friend Katie Leen. Here is a what she has to say: We do a lot of our own work because of our frugality. I cut all the kids hair, Sam’s hair and my own. Once every 5 years I go to a professional but I can’t see much difference.
I have learned to plaster, sand, paint, sew, bake, cook, and make things I want just because I can.
My friend Catherine likes to repair her old socks.

How to save money and time by cutting your own hair


Alain cutting his own hair
I save about $150 per year, plus the trip to the barber and the waiting time.

Autotonsorialist: (Noun) One who cuts their own hair.

I have been cutting my own hair for about two years now. This is how it all got started:

I used to love my barber. His shop is located only 5 minutes away from my apartment. I used to pass right in front of his shop and if there was no waiting line, I used to get in and get a haircut in a few minutes. His price is only $13. He’s fast, friendly and he has this ability to make anyone feel at ease.

My friend Raja has it easy, he probably can cut his hair with his eyed closed

But all good things come to an end. His shop started getting busier and busier. Now there is a waiting line just to get in and if I want to see him, I have to plan for 30 minutes of waiting time.

One day, out of frustration, I went to the hairdresser across the street. He took care of me immediately, but his haircut was $35 and in no way any better. I paid three times as much for nothing extra.

I went right from the hairdresser directly to the pharmacy store and I bought a hair cutting kit ($35). How hard could it be to cut one’s hair?  With a short clip, I cut the sides and the back and with a longer clip I cut the top.

I made my money back by the second haircut. The benefits were numerous. I save about $150 per year in haircuts. I also save the time. I don’t ever have to wait for service. I unbox my clippers and start cutting away. The whole thing takes me about 5 minutes to cut and 2 more minutes to clean. In addition, my hair always looks freshly cut and I have a sense of pride after doing each haircut.

Natalia cutting her own hair.
Natalie has been cutting her hair for 15 years now. Assuming a savings of $300 per year at 6% rate of return, she has saved $7,400

The only drawback is that I am limited to only one style. I don’t know any other cuts than short on the sides and long on the top.

I noticed that my friend Raja also cuts his own hair and I fell a sense of comradely with him. But also, at my new year’s party, while talking to a girl, she told me that she too cuts her own hair. I was intrigued and I asked my Facebook community. I found out that several of my female friends also cut their own hair. Here are pictures of Natalie and Annie.

If you are a woman, the savings can be significant. One of my female friends pays $50 for a haircut, if she gets 6 haircuts during the year, she is down $300. This money could be put to better use, either saving it or going to the restaurant with friends.

Have you ever heard of the Pink Tax? Many products or services are marked up when they are targeted to women. Haircuts is one example, but also razor blades, shampoos, conditioners, shaving cream, girls bikes, etc. have a bigger markup when marketed to women.

If you have never cut your own hair, I suggest you give it a try. If you screw it up, what’s the worst that could happen? It will always grow back. It won’t be the end of the world. On the other hand, if you succeed, you will save lots of time and money.

Annie cutting her own hair.
My friend Annie. You should see her in person, her hair is gorgeous.

If you are a woman, here is a video that can show you how to cut your own hair.  https://youtu.be/kgYVImOwYiI

If you want to share your experience cutting your own hair, please send my a message or share your experience in the comments.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

How to save money at the movies

Spending time with friends

Go to the movies on Tuesdays

Frugality is about getting the most out of your money, not being wasteful, being a prudent consumer.

Last Tuesday I organized a movie outing with my friends. Many of us watched the movie Arrival and we had an amazing time.

We met at a close by restaurant where I had the chicken wing special $0.50 per wing, and then we went into the theater where we bought the tickets at a reduced price $7.25, instead of the regular $13.50

I don’t know why movies are less expensive on Tuesdays, they just are, and I don’t have to know the reason, I just have to adjust my behavior to spend my money more efficiently.

Watch a movie at home.

A few days later, I watched the movie Snowden, with my friend Mala in her living room. The movie was only $6 through Apple movies, plus we had snacks and wine. It felt more like a luxury that frugality.

When you are frugal, you don’t have to give up anything, you just have to be more efficient spending your money.

How are you frugal? Do you go to the movies on Tuesdays?

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

 

How to save money at your new year celebration

Celebrating Halloween with friends.

New year parties are too expensive

One of the things that bother me about new year’s celebration is how much it cost.

A quick glance over the internet showed me that a regular ticket to get into most clubs is about $50, plus drinks. So, assume that you pay $50 to get in and you have 2 drinks, you are already in the hole for $70. And if you decide to dance and or drink for a couple of hours, you will be spending over $100. I don’t know about you, but for me, that is a lot of money.

Last year I went to my friend’s house

Last year I went to a friend’s house party and I had a great time. At about 12:30 am, I drank a big cup of coffee and I went to work for Uber. That night I made about $200. I had a great time with my friends and I made some money.

Potluck at my place

This year, a friend suggested that I should make a new year party at my place. I accepted his suggestion and we are having a party at my place. I am sure I will have a great time with my friends and it will cost us almost nothing.

Ways to celebrate New Year without spending a lot of money
  1. Don’t go to the bar, don’t go to the restaurant. Most entrance fees will be over inflated and almost everywhere will be overcrowded. In short, you will get lousy service and pay premium prices.
  2. Go to a friend’s new year party or create your own. In my case, I am doing a potluck. So I will buy some beer ( a six pack will cost less than $10) and some food ($10). I will get to eat and drink with your friends, talk to them and save lots of money.
  3. Save money in transportation. If you live in a big city, most metro and train services will be open all night long. It is almost certain that you will not be able to find a taxi, if you use your own car, you will not be able to drink and most likely you will have a hard finding a parking spot, and if you use Uber, for sure you will pay a high price for it.
  4. If you live in Montreal, there will be a big firework at midnight, but most major cities will also have fireworks. This will cost you nothing.
  5. If you live in Montreal, there will be a free outdoor concert at the Pier Jacques-Cartier. Most major cities will also have some music to celebrate.
Frugality is a life style that can take you to financial independence much faster

Being frugal is a lifestyle. You can have lots of fun, you don’t have to deprive yourself of anything, you can have a richer life and you will be financially independent much faster than the people who spend blindly.

Happy New Year.

The case against Christmas consumerism.

Christmas is about spending time with friends and family, not about buying stuff

What I like the most about Christmas is that people make an effort to spend time with each other. Families get together, coworkers create office Christmas parties, and many social clubs, such as my McGill Toastmasters club, create amazing parties full of dance and artistic performances.

However, there are two things I don’t like about Christmas

  1. I usually gain between two to five pounds. We will talk about this in another article..
  2. The one thing that I truly dislike is the commercialization of the holidays. It’s not about buying stuff people, it’s about enjoying time with each other.

Why I don’t like Christmas?

  1. You are buying things for the sake of buying.
  2. You are encouraging over consumption
  3. For those who are in debt, they are getting into deeper debt
  4. You are destroying the environment by buying all that useless plastic
  5. You are wasting your time by thinking about gifts, going shopping, and wrapping gifts.

Why is Christmas focused around buying thing as opposed to just hugging each other and having joyful conversations? Because our brain has been programmed by the advertising companies to buy, buy, buy… And we submit to it. Buying is part of our subconscious.

No one really cares about the gift. How many people get the same socks, the same ties, the same scarf, the same plastic stuff year after year? They act presently surprised, they fake a polite “thank yous” and put it aside.

We are killing the environment. Think about all the plastic, paper, bags, cardboard, batteries, advertising flyers, fuel, wrapping paper, that is wasted every Christmas. Shortly after unwrapping the gift, we put all the packaging in the recycling bin because we want to save the planet. If you want to save the planet, don’t buy all that stuff. It is ironic that we go around criticizing Donald Trump because he does not believe in global warming and here we are creating more pollution to honor the birth of Christ.

Most people can not afford it. I know people who are in a lot of debt or who struggle to pay their bills, but they do their annual pilgrimage to the shopping center… If their friends and family really cared about them, they would ask them not to bother spending their money, to save it to get out of debt. But not, we don’t want to kill the Christmas spirit. Go shop even if you cannot afford it.

Wasted time and mental energy. Whether you do it online or you go to the mall, it takes time to think about what you are going to buy, look for the best deals, buy it, wrap it, store it, and transport it. Really, is that how you want to spend your time and energy?

The clutter: after receiving all those unwanted gifts, we just put it in the closet, in the garage, in the cabinets, and we keep it there occupying space, cluttering our lives. We have so much already, things we forgot we have, yet we continue piling it up.

What are we teaching our kids? We are teaching them to become consumers, to appreciate objects, things. When I was a kid, my father gave me many Christmas gifts, but he was never there, he was always too busy working. He never had time to give me the love I craved. I would have preferred a thousand times his presence than his plastic toys.

What do I tell my family? I am sure there are many more serious thing you have told your family and they still love you and accept you for who you are. How about simply telling them, in advance, not to buy you any gift and warn them that you will not be buying gifts either. You will only have to do it once and then it will become part of the tradition. Hopefully they will follow your lead.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

Book Review: Secrets of the Millionaire Mind by T. Harv Eker


Secrets of the millionaire mind

It’s all about the mindset

Our financial success or failure depends mostly on our mindset. Two different persons could have the same capital and the same training but one person will struggle financially while the other will flourish.

T. Harv Eker helps us develop a Millionaire Mind, he helps us develop a mindset to become better persons and to increase our net worth.

The love of money is the root of all evil
Mascaraed party
Mascaraed party

In some cultures, wealth is seen as something evil, something that you want to avoid in order to conform to your environment. If you become too well off, you will stand out and other people will either look at you with scorn or try to take advantage of you. Many times we prefer to stay poor in order to continue being part of the herd. T. Harv Eker helps us to think differently, he teach us how to break the fear of standing out, the fear of being different, the fear of being better off.

Same recycled ideas

There is nothing new in this book. In fact, there is nothing new in any of the self-help books I have read in the past few years. They all cover the same recycled ideas of taking responsibility of your life, setting goals, serving others, etc. However, as a person with a desire to improve my life, I need to continue reading the same message, from many sources, over and over again. It makes me feel motivated and energized. It helps me  set new goals and bring them to fruition. I need to hear the same message from  different messengers. Think of it as a religion, even if you are already a believer, you still want to continue listening to the weekly sermon.

There are two things which I didn’t like about this book.

    • Many of these self-help authors use their books as a promotional pamphlet to sell their workshops and/or seminars for which they charge thousands of dollars.  Another author who uses his own books to promote his seminar is Tony Robbins. At given moment you start feeling disgusted with so much self-promotion. Yes, the material is good but if you are going to push your product so hard the book should be free.

At given moment you start feeling disgusted with so much self-promotion

    • The second thing I didn’t like is that the author promotes the idea or desire to be wealthy by putting down people who don’t have the same ambitions. He displays an “us-vs-them” mentality. Let’s face it, to become rich is not everyone’s priority. Some people want to focus their lives on other things which are more important to them. The same message -to become rich- can be given without putting down people who don’t prioritize wealth.

All that being said, these are T. Harv Eker’s 17 principles for building wealth.

1. Rich people believe “I create my life.” Poor people believe, “Life happens to me.”
2. Rich people play the money game to win. Poor people play the money game to not lose.
3. Rich people are committed to being rich. Poor people want to be rich.
4. Rich people think big. Poor people think small.
5. Rich people focus on opportunities. Poor people focus on obstacles.
6. Rich people admire other rich and successful people. Poor people resent rich and successful people.
7. Rich people associate with positive, successful people. Poor people associate with negative or unsuccessful people.
8. Rich people are willing to promote themselves and their value. Poor people think negatively about selling and promotion.
9. Rich people are bigger than their problems. Poor people are smaller than their problems.
10. Rich people are excellent receivers. Poor people are poor receivers.
11. Rich people choose to get paid based on results. Poor people choose to get paid based on time.
12. Rich people think “both.” Poor people think “either/or.”
13. Rich people focus on their net worth. Poor people focus on their working income.
14. Rich people manage their money well. Poor people mismanage their money well.
15. Rich people have their money work hard for them. Poor people work hard for their money.
16. Rich people act in spite of fear. Poor people let fear stop them.
17. Rich people constantly learn and grow. Poor people think they already know.

Conclusion

Overall, I give this book 3.5 stars over 5. It’s a good read and you will learn a lot, but you have to endure all the self-promotion and the idea that rich people a better than poor people. Rich people are not better that poor people, they just have different priorities.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.