Index/ Passive investing 9


You probably heard of people saying “the market is doing great and my portfolio went up by 3 % last month” What does it really mean by the market? The market is index. In US they are S&P 500, Nasdaq, Dow Jones and in Canada they are TSX, TSX-V etc…  When people say index/ passive investing, then they would buy and hold a proportional portfolio of stocks that mimic the index. Why would they do that? Because it is easy and very profitable.

Conveniently, there are some good easy options for you to buy investments that mimic the index.

First of all, mutual fund that is actively managed by professionals. The key word is active. Since it is actively managed, the MER is higher. MER is Management Expense Ratio and it is the cost of managing the fund which is paid to fund managers. Does it mean it performs better than index?  Yes and No.. When I did not know much about investing, I put all my money into mutual fund.  I had like 4-5% of return every year however I realized if I invested in another cheap index fund then it could have been 6-10%. Of course I sold all my mutual fund and invested all my money in some ETFs.

Secondly, ETF. It is short for Exchange Traded Fund and it is great. It has lower MER than the most of mutual funds (ETF: 0.05%-0.5% or up VS mutual fund 1-3%) and therefore even if it performs similar to mutual fund the profit is higher due to lower MER. When you think about it, it is outrageous. For example, if you make 5% of return, the bank takes 2% then you will end up having only 3% of return.  Or if your fund loses 2% then you will end up having 4% of loss. Over years, you will be paying so much $ to your investment advisers on the same or even worse profits than ETFs

Both of them are easy to maintain but I recommend good diversified ETFs than mutual funds. It is easy and performs better than the most of mutual funds and due to its lower cost, more of your investment will be taking advantage of the law of compounding (8th wonder of world) and you get richer faster.

 

Here are my favorite ETFs

Total US market (VTI- USD, MER of 0.05%)

Canadian Large Cap (VCE- CDN, MER of 0.1%)

International developed market (VEA-USD, MER of 0.09%)

Total World Stock (VT- USD, MER of 0.18%)

 

Stay tuned as I will explain more of ETFs soon.

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