THE ULTIMATE BEGINNER DIY INVESTING VIDEO GUIDE FOR CANADIANS (Index Funds) - Updated 2019
Get started with as little as $1,000
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My name is Braden Dennis and I am a regular guy, who works a 9-5 job just like most people. I studied engineering and currently work in that field. I - like you – started making some money at my job and didn’t want to invest it somewhere where I am paying high fees and have very little control over what is happening.
I began to read, read, read, listen to podcasts, connect with some prominent investors, look at the numbers and figure out how I could KEEP the money I was investing without paying someone else’s salary with my investment fund. Luckily for you –what I am talking about has never been easier and it is so surprisingly easy that I thought this course would help many Canadians in a similar situation I was once in.
In two-three hours, you will go from having little or zero knowledge on investing your money on your own, to having your diversified portfolio off the ground and invested. I will also provide a free $50 in your portfolio as a partnership agreement I have with Questrade. That means the price of this course is really just the price of lunch. Low fees is a major concept of the course, and I wanted to replicate that in your first step as an investor.
I called the course “how to start investing with $1000” because everyone should have $1000 at a minimum to start a Do It Yourself or, DIY, investment portfolio for Canadians. This is for two main reasons. If you do not have $1000, you need to save liquid cash before you enter the market in case of emergency. Another important reason is – you require $1000 in your portfolio to start with Questrade, the discount brokerage service I will be recommending.
Questrade lets you buy Exchange Traded Funds for free. We will talk more about Exchange Traded Funds or, ETFs for short, a LOT more in this course as it by far the simplest way to start achieving superior returns in the stock market when compared to mutual funds. I just want to say a quick congratulations on starting your own DIY portfolio as the banks and their mutual funds will eat away at your investment gains over a long period of time.
It is important that I note all of the information will be found here in chapter videos. The text will be also provided here on the website below each module, but is not absolutely not necessary to read. But, more of a reference later if needed.
What you will need for this Course:
· A minimum of $1,000 to start investing.
· Social Insurance Number – we are going to be investing in accounts that have tax free gains in a TFSA so the government will need to know about it. This is the single greatest investment account as a beginner if used correctly.
· ID – drivers license or passport
· Be A Canadian. A US version of the course will be replicated in the future.
CHAPTER 1: INVESTING 101 -
THE STOCK MARKET
Hello everyone and welcome to the first Chapter, Investing 101 – The Stock Market. I am going to start by explaining some very basic terms that you will need to understand in later chapters. The stock market is a wonderful thing and it has never been easier to start a diversified portfolio for free with just a few clicks on your computer.
Basic Glossary Explained in Braden’s Terms:
I say in Braden’s terms because I know I was once sitting in most people’s position where I was keen to start, but needed someone to start at ground zero. Instead, I learned through years of reading, researching and listening to the best investors of all time. Luckily, I did that all for you and happy to help.
· Publicly Traded Company – I am going to use my favorite analogy of explaining the stock market which was explained to me by author Andrew Hallam in his book, The Millionaire Teacher.
Willy Wonka has a chocolate factory and wants to open another factory to double his revenue. Willy Wonka’s second factory will cost $100M to build and he doesn’t have that much capital available. He lists his company on a stock exchange, gives up some ownership of the business, becomes a publicly traded company, raises money for his factory, and investors can buy partial ownership of the business through publicly traded stock.
· Stock – a small piece of a publicly traded company. Think about how you now own some of Willy Wonka’s chocolate business.
· An Index – an important topic of the course. Indexes simply track the performance of a basket of companies. We will focus on broad based indexes. More of this later.
· Exchange Traded Funds (ETFs) – ETFs are a low-cost way to buy a large basket of company stock on the stock exchange. Hence the name, exchange traded fund. ETFs are how we will buy “an index”. I will show you exactly how to do this and which ETFs to buy.
· Discount Brokerage – The means of cheaply buying investments that were once only available to investment professionals. If you don’t currently have a portfolio, I will show you how to use Questrade as they let you buy ETFs completely for free. Also, they will give you a free $50 in your portfolio in a partnership I have with them.
Explaining the Index Fund
The Index Fund is a simple and low-cost way to own an index. An index is simply tracking a basket of companies in a particular sector. We will focus on broad based indexes like the entire stock market from a given country. For instance, we can buy the entire American stock market with one simple low-cost index fund. To achieve this, we will use Exchange Traded Funds, from here out referred to as ETFs, from low cost ETF providers.
"A low-cost fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth."
– John Bogle, Founder of Vanguard.
Ben Graham, Warren Buffett’s mentor, is telling John Bogle the beauty of index funds. This must have resonated enough with Mr. Bogle enough to start Vanguard, an industry leader in broad based index ETFs.
I just want to reiterate that an ETF is simply an easy way of owning an index. That is it, nothing complicated! This will make way more sense when we go buy our first ETF in this video course.
Let’s look at how a broad-based index portfolio would have performed over the last 90 years. This chart is the S&P 500 – which is an index of the 500 largest companies in America. Through one single ETF, you can own a small sliver of all 500 companies. This includes some of the most rough economic times in history.
10% is the average annual of the US stock market over the last 100 years. All you have to do is consistently invest money into index ETFs over a long period of time to achieve incredible long-term results. There may be several years of negative returns, but with good patience and continued investing when markets are being punished will provide you with amazing success.
Lets look at 2017-2003’s annual returns of a broad based index like the S&P 500. Some years were fantastic and some were horrible. Look at 2008, the financial crisis and stocks sold off at a loss of 37% which investors call a bear market. The market then rebounded 26% and has had consistently great returns all through to 2017 which investors call a bull market. If you had the temperament to invest money as you would normally in 2008, you would be buying the market at a discount. Now we are buying literal pieces of companies like apple, google, amazon, McDonalds, Tim Hortons, TD bank and many more at a fraction of what they are truly worth.
Crashes Are Inevitable
When we look at more years of data, from 2002 to 1988 we find a similar story. Crashes are inevitable as investors get over excited and run with emotion for many years of a bull market, that naturally the true value of the underlying companies in the index have to correct themselves. Look what happened in 2000-2002 after an insane run of stock gains from 1995-1999. This is completely normal and should be expected.
If you are able to think rationally and continue to invest during these time periods of fear, you will come out on top. As Buffett says, be greedy when others are fearful and vice versa. This era from 1995-2000, investors were excited from the potential implications of technology on business and thought the sky was the limit for company valuations. Obviously, this cannot continue forever, and the market needed to come back down to life. Next we will talk about dividends.
CHAPTER 2: DIVIDENDS
Dividends are simply my favorite thing about being an investor and very simply understood so I will whip through this chapter quickly. Companies will reward shareholders with cash distributions. Yes – you will literally get cash delivered like magic every business quarter, which is every 3 months, into your portfolio. Whether the market is doing good or bad, you will get cash delivered quarter after quarter.
Einstein called compound interest the eighth wonder of the world for good reason. Dividends will allow you to automatically repurchase more of a company automatically every quarter. This means that the following quarter, even more shares of the company, or ETF, in our case, than previously. ETFs own pieces of these businesses that dish out cash to investors – so you will be the benefactor of that directly into your brokerage account.
Vanguard FTSE Canada All Cap Index ETF
The dividend yield on the Canadian stock market ETF, VCN, which we will use in model portfolios is 2.8% as of making this course.
This means you will get 2.8% of your total investment back annually in the form of dividend income. This is comparable income yield to a bond index and is the reason I don’t like bonds and especially bond ETFs. They do serve their purpose, but I will talk more on this in proceeding chapters.
Vanguard FTSE Canadian High Dividend Yield Index ETF
You may choose that you want a high dividend yield to provide income and stability to your portfolio. The Canadian high yield dividend index can be purchased through ETF, VDY, which will feature a basket of companies that produce a large amount of cash distributions to investors like yourself in the form of quarterly dividends.
CHAPTER 3: MODEL ETF PORTFOLIOS
UPDATED 2019 LOWEST COST ETFS. Refer to charts and graphs below for updated summary.
US Total Stock Market - XUU Replaces VUN.
XUU is the same US Total Market ETF with a new lower management fee from BlackRock.
NOTE: If you are unsure which model portfolio is the best for you. Model portfolio A is a great option. Model portfolio B is also great if you are interested in seeing some additional diversification. Regardless, you cannot go wrong with A,B, or C!
Hopefully you are convinced that this long term, simple and cost-effective strategy is going to serve you well if you can stick with it. We are almost ready to implement it on your first investment, but first let’s discuss some model ETF portfolio options we are working with. The beauty of ETFs is that you can own international businesses, but trade them in your own currency. So in this case, we can buy baskets of stocks around the world on the Toronto Stock Exchange.
Now we are going to talk about three model portfolios: A, B and C. You can freely change the percentage of your $1000 (or more) that you want in each. When we open our account, I will show you exactly which ETF ticker symbols to buy to achieve this desired portfolio allocation.
Model Portfolio A consists of three indexes.30% or $300 of a $1000 portfolio in the Canadian Stock Market.Again, this will simply be a large basket of large Canadian companies.30% or $300 of a $1000 portfolio into international stocks outside of north America.This will include the leading businesses from Europe, Japan Australia and more.40% or $400 of a $1000 portfolio into American stocks.This will make you a part owner of companies in the US.
Model Portfolio B is a little more fun by adding some other indexes like Canadian Real Estate Investment Trusts (REITs). They will pay high dividend yield. I have also introduced the emerging market stock market. You will now become a part owner of Chinese and developing nations companies.
Model Portfolio C is buying all of the public companies that are big enough to meet the global index requirements. With one simple action and probably the amount of time to grab coffee once a year, you will be taking advantage of the global stock market. One ETF holding and you will be diversified into thousands of wonderful businesses around the world.
What about bonds? If you don’t know, many people suggest a bond ETF to stabilize a portfolio with fixed income. Feel free to research bonds by yourself as I don’t invest in an aggregate bond index ETF myself. I have mentioned on the Stratosphere Investing Podcast before that:
1) I don’t like bonds if your investment horizon is longer than five years.
2) I really don’t like bonds in the current environment.
3) Dividends in a broad-based index provide safe dividend quarterly income and will have currently similar yield to current government bonds.
4) I have so much faith in the stock market over the long term, that so should you. Short term drawdowns should only be presented as opportunity.
I have created Model Portfolio D if you really want bonds to stabilize your portfolio during drawdowns with 80% stocks and 20% bonds. It is essentially just model A with bonds added. 80% equities, or stocks, and 20% bonds.
CHAPTER 4: OPENING A DISCOUNT BROKERAGE ACCOUNT
NOTE: The annual TFSA dollar limit for the year 2019 is now $6,000.
OFFER CODE: d0mhlj9c
Now that we have looked at index funds and how we can buy them on the stock market via ETFs, we are ready to put theory into action by finally opening a DIY discount brokerage account. There are many brokerage providers that vary in different fees and portfolio minimum size requirements. All of the big banks provide their own DIY brokerage accounts that vary from 7 dollars a trade to 10 dollars a trade.
But, Questrade lets you BUY ETFs for free. Meaning, you will spend zero dollars in fees to build the portfolio for this course. If you already have an account, replicate the model portfolio in your own account, but if you use my Questrade link you will get $50 in your portfolio. I should disclose I get compensated from Questrade for recommending their product. However, it is a fact that their service is the best for an index investor with zero ETF commissions, which none of the big banks offer. In summary, I recommended Questrade prior to getting this partnership. We are going to open a Tax Free Savings Account because they are simply the best and I will explain why.
What is a TFSA?
If you already have one – do not worry, you can register another one with Questrade. We just have to be wary of Contribution Limits.
A TFSA, or Tax Free Savings Account allows you to make investment gains AND receive dividends from your holdings with zero capital gains tax. This tax sheltered account will keep your portfolio growing without the tax man taking your sweet investment gains. The TFSA is unfortunately misunderstood and I have a theory that it is because of the name itself. A TFSA has S for Savings. It should be called TFIA for tax free investment account.
Because the government cannot tax your gains in a TFSA, they limit the amount you can have in the account before forcing you to move more money into an account where they can tax you. The current federal government has the TFSA as of writing this is $5,500. You can catch up on previous years before starting to invest since you were 18. This will become much more clear with an example.
The annual TFSA dollar limit for the years 2009, 2010, 2011 and 2012 was $5,000.
The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.
The annual TFSA dollar limit for the year 2015 was $10,000.
The annual TFSA dollar limit for the year 2016 was $5,500.
The annual TFSA dollar limit for the year 2017 is $5,500.
The annual TFSA dollar limit for the year 2018 is $5,500.
The annual TFSA dollar limit for the year 2019 is $6,000.
The math becomes pretty simple when you add the dollar contribution limit for every year you are over 18 since inception of the program. You are able to catch up on previous years that still have room in your contribution limit. The contribution limit is a federal decision from the current political federal party in power. Lets look at an example.
Hypothetically, someone started investing in 2017 when they are 21 at the time would be able to:
· Invest $5.5K in 2014 at age 18
· $10K in 2015 when 19
· $5.5K again when in 2016 when 20
· $5.5K when 21
This results in this person being able to invest a maximum of $26,500 dollars when they start investing.
You may also go to the Canadian Revenue Agency website, enter in your SIN number and see your exact limit right now at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributions.html
If your limit is less, this may be because you may already have contributed to a TFSA to put your cash in there but, remember we need to start treating our TFSA’s like TFIA’s, tax free investment account. You can actually pull this money out back into your bank account and then load it onto your TFSA.
CHAPTER 5: THEORY INTO ACTION
BUYING YOUR FIRST ETF SHARE
CHAPTER 6: DOWN THE ROAD - REBALANCING
IMPORTANT NOTE: If your account has less than $5,000, Questrade will charge you inactivity fees (currently $24) every quarter (3 months) that you don’t do anything in your account. If your account is under $5,000, make a contribution and buy more of the ETFs in the model portfolio every 3 months. Even if it is 1 share of an index ETF. You don’t have trade commissions, so this is your best option. Once your portfolio hits 5K, you won’t have to worry about Questrade inactivity fees.
Questrade does not charge annual account fees. However, some accounts may be subject to quarterly inactivity fees of $24.95 CAD.
It’s easy to keep your account active. Here are some of the ways in which you can do it:
You place one trade in the quarter (January – March; April – June; July-September; October-December)
You have total equity across all your accounts of $5000 CAD or more
You are under 25 years old
You are subscribed to a data package
You deposit $150 in the quarter
You only need one of these five requirements to avoid inactivity fees. For example, if the total equity in your accounts is over $5,000 CAD, you will avoid the fee without having to place any trades.
Also, if you were charged an inactivity fee in the last quarter, you can have the fee rebated back to you by placing trades in the current quarter. As such, your commissions from trades will be rebated in cash up to $24.95. For example, if you didn't trade in the first quarter of the year (January–March) and were charged an inactivity fee, any commissions you pay for trades made in the second quarter (April–June) will be rebated up to $24.95 to compensate you for the inactivity fee that was charged for not trading in the first quarter.
Congratulations, you have started your investment portfolio on your own. Now we need to talk about managing it in the future. The benefit of ETFs, is the management is quite simple. You can take as little as 15 minutes a year to maintain your portfolio. In fact, the less you manage it, the better because humans are succept to making emotional decisions that are not rational at the time. The percentage of each index ETF in the model portfolio you choose you will continue to maintain. For instance, if the US market does really poorly, but the international index does really well, you will rebalance the amounts to match your allocations in the model portfolio.
Lets use an example - ETF, VUN, has a bad year and is now worth only 35% of the desired 40%, we will buy more of VUN. This is the opposite of what your brain will want to do. You will think, why would I buy the one that has done horribly and hold off on buying more of the one that has been great gains.
The reason is because you will be buying the poorer performing index at a discount to the real intrinsic value of the assets held in the basket of companies you own.
Just like Warren Buffett says, we buy stocks like we buy socks, we like buying things on sale.
So, we will do this rebalancing of our portfolio at a desired specification. Since the fees are low, or zero if you are using Questrade, you can continue to add to your ETFs on a monthly, quarterly or annual schedule depending on your preference and personal finance. Catching up on your TFSA contribution limit should be your first financial goal with your investment portfolio. Tax free gains and dividends will (slowly) make you very rich if you start now.
Thank you everyone for taking this course. I hope you all take a very essential life skill away from doing the course. This is the absolute best way to own stocks as a Canadian. You can absolutely incorporate this strategy for the rest of your investing life as it is time tested over 100 years of market data. If you do want to start being a little more concentrated in certain businesses in Canada that you may like and think may outperform the index, check out Stratosphere Premium where I give people exclusive access to my real portfolio of stock picks which includes some international ETF exposure that we’ve learned from this course. But, I encourage you to use index funds for the foreseeable future until you really get a knack for investing. At the end of the day, as long as you are not paying insane mutual fund fees, you are light years ahead of your peers that approach banks and other financial institutions to get funnelled into their products.
If you enjoyed the course, please leave me a message in the form below to give your feedback. If you have someone you know that can benefit from the course, also drop me a line below and I’m happy to help. So go out there, stick to the plan, continue to learn, and above all be patient in the markets if you want to be successful. The only one who gets hurt on a roller coaster, is the one who jumps off.
Thanks again, I hope you enjoyed the course.
Exclusive Offer for Completing this Course
Congratulations for getting started with ETFs. If you do get the urge to pick individual companies alongside your broad-based index funds like I do, I am offering 25% off your first year of Stratosphere Premium.
Stratosphere Premium provides exclusive access to my exact investment portfolio and has a new individual company stock pick every single month. I pick companies that are growing, pay a growing dividend and is trading at attractive prices when compared to their business results.