Who’s Afraid of the Big Bad Stock Market?
The following is a guest post by Mr. OYP who will be posting on this site from time to time.
The stock market. To some, that evokes images of people in coloured jackets waving papers in the air and shouting buy and sell orders on the floor of the stock exchange. To others, it may paint a mental image of a jagged, roller coaster like chart with huge ups and massive downs. To me, it gives me a warm fuzzy feeling inside knowing there is a place I can put my money that will give me higher overall returns than my “high interest” savings account or by hiding my money in my mattress (assuming I ride out the roller coaster for a long period of time).
Whenever the topic of money or investing comes up in conversation, I get excited. It is one of my passions. However, I’m often surprised at how many people I talk to that don’t invest their money in the stock market because they don’t know how, don’t know where to start, or are simply afraid to lose their hard earned money. It’s amazing to me that some people view investing in the stock market the same as walking into a casino and throwing it on the tables.
Sure, if your only exposure to the stock market is watching people panic in the 2008 meltdown or watching people “make it big” or lose it all investing in single stocks, it certainly can be scary and intimidating. However, the stock market does not have to be scary, nor does it have to be akin to gambling.
How to Get Started
To take the uncertainty and fear out of investing, start by investing in simple, passive index ETFs (exchange traded funds) or index mutual funds. Ignore the noise and the trends. I prefer ETFs because they tend to have lower fees and I can buy them easily through my online brokerage account.
You might have heard of index investing before, but what is it? Well, it is simply investing in a large basket of stocks that mirror a stock exchange. For example, you can buy a TSX (Toronto Stock Exchange) index ETF that mirrors the performance of the TSX. By buying one simple ETF, you have just bought all of the stocks listed on the TSX (Canadian market). Same goes for buying an S&P 500 ETF – buying this will give you exposure to all the stocks in the S&P 500 (the 500 largest stocks in the US market). This spreads out your exposure to different companies and takes the guess work out of picking individual stocks.
For Canadian beginners, a good starting point would be to purchase 4 ETFs: a TSX index ETF; an S&P 500 index ETF; an international developed markets ETF; and an emerging markets ETF. You can determine your own allocation, but I think a good place to start is having 30% TSX, 40% S&P 500, 20% international developed markets, and 10% emerging markets. This will give you broad exposure to the largest companies in the world and instant diversification. As you learn more about investing and get more comfortable, you can play around with your allocation and even add another ETF, say a small cap value ETF or a REIT (real estate investment trust) ETF to give you exposure to real estate within your stock portfolio. REITs provide a bit more diversification to your portfolio because they are not completely correlated with the stock market and may go up when the stock market goes down or vice versa. These are just my thoughts on allocation, so please do your own research, and consider consulting with a financial professional, before investing.
You can buy ETFs in an online brokerage account. I use self-directed accounts in BMO InvestorLine because I do all of my banking there, but you can use any of the other banks, or a brokerage like Questrade. BMO charges $9.95 per trade, whereas I believe Questrade allows for no fee ETF purchasing.
I mentioned that ETFs tend to have lower fees than mutual funds. In Canada, we have some of the highest mutual fund fees in the world. Most people don’t pay any attention to their mutual fund fees as they’re simply built into the fund and get taken off without you noticing. Let me tell you, when you’re paying over 2.6% in management expense fees, it doesn’t sound like much, but over the course of your lifetime, it can easily eat away hundreds of thousands of dollars from your nestegg. Passive index ETFs can be purchased for extremely low fees. For example, the BMO S&P/TSX Capped Composite Index ETF (ticker symbol ZCN) has a MER (management expense ratio) of 0.06% and the BMO S&P 500 Index ETF (ticker symbol ZSP) has a MER of 0.09%!!! Those are extremely low. Your mutual fund with a fee of 2.6% would have to outperform the index by 2.54% and 2.51% respectively just to match the performance of those ETFs. Most mutual funds don’t even match the indexes they are tracking, so why put yourself in a hole from the start? Just make it simple and buy some index ETFs.
Like I said, if you’re going to buy individual stocks, then you’re likely gambling with your money because most people (myself included) don’t know how to valuate companies in order to determine which stocks are good buys. So, just start by index investing. If you’re in it for the long haul, the best thing to do is buy and hold, i.e. don’t panic and sell when the market drops, and continue to buy ETFs at regular intervals to utilize dollar cost averaging. Over the course of your investing lifetime (say a multi decade period), your money will recover the losses suffered in a correction or bear market and grow exponentially thanks to compound interest. Besides, the annual return for the S&P 500 from 1928 to 2017 is about 10% (inflation adjusted to about 7%). So, if history is any indication of the future (caveat, past returns are not a guarantee of future returns), you can expect that during your investing career, if you just track the S&P 500, you’ll average out to a 7% annual return after reducing for inflation.
Sure, some years you will lose money on paper as the market moves in cycles. It has a history of going up and down and being very volatile sometimes – just like October was. We have also seen a historic bull market in the last 9 or so years, so it is inevitable that we will see a correction or bear market in the future – could begin tomorrow or could be 2 or 3 years from now, but it will happen. Don’t panic and sell when the market drops if you have a long investing horizon – the market will recover, eventually. Just keep buying those ETFs at regular intervals and get excited when the market dips as you’ll be buying at a discount!
Just remember that if you’re young and have a long investing horizon, what do you care if the market goes down? You should actually be excited when that happens because you can buy your favourite ETFs at a discounted price and will have more room for your money to grow when the market eventually recovers. Also, unless you sell when the market drops, you haven’t actually lost any money – it’s just on paper. Don’t try to time the market by jumping in and out as nobody knows when we’re at the top or when we’re at the bottom.
Just get started, don’t be afraid. The best time to start investing was yesterday, the next best time is today.
Want to learn more? Check out these related posts:
- I’ve written an article here on the basics of the TFSA and RRSP. Both are ideal places to hold your ETFs in as long as you have contribution room left. Otherwise, a non-registered brokerage account is your option.
- For 9 ways to take control of your finances in 2019 click here.
- Ms. OYP paid off $98,500 in 3.5 years – find out how she did it:
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Please note that I am not a financial professional, so this is purely based on my own experience investing in the stock market. Index investing is simple, cost effective and efficient, so is ideal for the do-it-yourself investor. However, make sure to consult with a financial professional if you have questions.