SI 20: Passive vs. Active Management for Canadians
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As many investors shift to a self-directed investment portfolio, passive index investing is becoming more and more popular when compared to active management. As a Canadian, passive investing is great for gaining international stock market exposure for a rock-bottom low Management Expense Ratio (MER). Kornel Szrejber, from Build Wealth Canada, joins us on episode 20 of The Stratosphere Investing Podcast to discuss this topic in depth and create a list of actionable steps to take to avoid high fee management.
Active management is not a bad thing. In fact, I do actively seek individual companies on the Toronto Stock Exchange that I like for their undervalued dividend growth. The problem with active management is the high fee structure that typically comes with it. High fee management can cost Canadians over $300K in their portfolio with the over 2% expense ratio seen in mutual funds that the big banks will typically funnel you into. Flat fee management with a discount brokerage service is a much more cost efficient and transparent process and that is why I created Stratosphere Premium for Canadian investors. I go into detail with my stock picking strategy on The Investing for Beginners Podcast.
ETF Index Funds Discussed in the Show
To learn how to buy these Canadian index funds exactly step-by-step, you may be interested in learning How to Start Investing with $1000.
VCN - All Canada Stock Market Index
This Vanguard fund has a MER of 0.05% and will provide broad exposure to all market capitalizations in Canada.
XUU - US Total Stock Market Index
This iShares fund has a MER of 0.07% and will provide the entire US Stock Market traded in Canadian dollars. Pretty hard to go wrong here.
XEF - International Developed Countries Total Stock Market Index
This iShares fund has a MER of 0.2% and will provide companies internationally from Japan, Europe, Australia and more.
VEE - Emerging Markets Index
This Vanguard fund will provide exposure to Chinese and other emerging markets at a MER of 0.23%.
When comparing active and passive management, there are pros and cons to both. If you are in active management paying expense ratios every year, just make sure that your manager is not secretly closet indexing. Closet indexing is when a manager will charge their high fees, but actually just hold index funds for their clients. I see it all the time in Canadian investment portfolios. I hold international broad-based index funds (US, Europe, Emerging Markets) for the cheapest fee possible for 30% of the portfolio for Premium subscribers and proud of it. The difference is transparency and fee structure.
The Bottom Line
There are many things you cannot control as an investor like the macro economic environment and the investor sentiment that swings through bull and bear markets. However, you can control how much of your portfolio is getting eaten up by high percentage (MER) fee management.
There will be errors in transcriptions.
What's going on everyone. We've got an episode of the stratosphere investing podcast. We're here with Kornel Szrejber how are you doing? Kornell? Pretty good. Pretty good. How's it going? Good. Good. I, Cornell is doing the build wealth Canada podcasts and if you haven't heard the podcast, go check it out because I mean you're crushing the rankings man. Like thanks. He bring a lot of value to people and I think as we were talking before, really solving a huge problem for a lot of Canadians, which is the high free structure that we deal with some of the highest in the world. And uh, I think you're doing a great job, man. Thank you. Thank you. Yeah, I mean I think it's really important to generate some awareness around the subject because I mean, we were talking a bit offline before that we went live here and you know, we're talking about how they have some of the hype.
Canada has the highest fees pretty much were easily one of the highest peaks in the world, you know, on mutual fives. But a lot of KT Eden's don't know that they're even paying them. Right. I mean it's, and that's a huge thing. So I think it's one thing to just generate some awareness first to kind of get the, get people thinking, okay, let's look into this a bit further. And then once you kind of go down that rabbit hole, you really quickly figure out just how insane these, if these are at how much they're costing you. And as soon as you figure that out, uh, then you know that, that, that, that alone I think is motivation and off a lot of people to get their, their investments in order. And that just kind of go with that, you know, default, which is all is just go to some, you know, Major Bank and trust them fully and buy whatever they tell me to buy or let them buy it for you pretty much.
Right. And then pay two and a half percent and then you lose out on a few hundred thousand probably over your lifetime in investment fees. So, um, yeah, but not getting rent. I can rant about that forever. Well, the thing is like what we can do, you know there's a lot of things you can't control when you're investing. This is a topic I speak to all the time. I can't control what the TSX index s and p index, even all world index is going to do over the next year. Of course I can't, but what I can control is that I shouldn't be paying two and a half percent for someone to manage my money when only 8% of managers beat the s and p every year. That's a horrible, horrible number. And I just watched the video from some guy follow on linkedin and a 8% is the same odds as getting blackjack when you're on 19 so w who hits on 19 when you're playing blackjack, if you're not familiar with blackjack, you just have to get 21 with a set of cards and the odds of you getting blackjack when you have, when you have 19 is 8% and that's the same odds.
You can see when you're going to try to find a manager who's going to beat the market. I mean, they might beat the market by, you know, a percent or two a year, but overall after fees if you're going to lose. Hmm. I like that. That's good. I think that's a nice way of putting it because everyone will, who knows how to play blackjack would say, well that's crazy. Why would you hit on that? That, that
makes no sense. Uh, so though I liked that. It's a good, it's a good relatable example I think. And I, and what I, what blows my mind quite a bit too, I did some research on this and um, Canada also is the country that has some of the most, uh, closet indexing happening as well. And so, I mean, for anybody not familiar with that, I mean, what happens is you'll have some, a lot of these mutual funds, for instance, we'll say, okay, they'll charge you these two and a half percent fees and you know, they kind of call themselves, well, it's active management, we're going to be the market, that kind of thing. But then when you actually look at the composition of what's inside that fund that they sold you there, basically it mimics the index for the most part. It's just, it's so close to what the index is that you could pretty much, you're better Hava just holding the index, saving those, you know that two and a half, well you're not serving, you know, saving that you're two plus percent on fees and you're basically going to get the same performance, but you're obviously gonna get better performance because you're not paying that two plus percent.
So. So that's kind of the interesting thing too, which I think is also pretty ridiculous, right, is that you have so many people who are in these funds thinking, okay, my manager is great, I heard good things about him or her, it's going to be the market. But then you know, you look at if you're skilled enough and you know what to look for you, you can actually look at the composition of that and then compare it to the Canadian index for instance. And you say, oh my goodness, they have so little and things that aren't, that are kind of outside the index that really this thing is going to perform exactly the way the index does. So why the heck would I, you know what I mean? Why, why, why am I paying this premium to beat the market where the odds of me beating the market are, are so, so slip.
Right. So that's kind of, that's the other interesting thing that I found in my research as is just, uh, gotta be really, really careful about if you take the active management route, make sure they actually, it is true active management if you want to, if you want to play that game, which is obviously risky because now you're betting that the manager can beat the market. And as you've mentioned, you know, that's very rare. Um, but it's something like, you know, what does it is it's in the eighties or nineties, depending on what timeframe you look. I usually in the nine, you know, 90 plus percent that the active managers do not be the market. Um, you know, and, and that's, that's his thing. That's done by the SNP. Um, you know, there's a, there's a site, uh, this, this p of, I don't know if you've ever run across that, but they actually calculate all that and say how much, what percentage of men active managed funds actually beat the market.
You know, and it's like, well under 10%. And it's, it's, it's nuts, right? I mean you're, you're not gonna you're not going to do it basically. Is that on standard and Poor's website that they have? Yeah. Yeah. Like it's, it's, um, I think it's just, it's Spi, VA, if you, if you Google it and it's like, if you go to the footer, it says, I believe that it's by, uh, it's basically by standard and Poor's. Um, if memory serves, so you can, you can check that out. But it's, it's a really, it's very telling, right. Cause you may have someone, I mean, I think it's relevant for the listeners too, because they may, you know, maybe maybe you're talking to your parents or your friend at work and they're saying, oh, I heard that I have this great manager and their so great. Um, yeah, you know, Yada Yada, Yada.
And then, you know, you take them to this and you say, hey, did you know that it's, the odds are stacked so heavily against you. Just like you mentioned that, you know, the, the Black Jack example, I really do you want, it's like why would you play a game that you buy purchase? By looking strictly Paula ability, you're pretty much going to lose. I mean, the odds are so stacked against you, why would you do that? Right. It makes zero sense. So, um, so that, yeah, that's the thing. Um, yeah, no, that makes sense. Then that 8%, I mean it's definitely not helping them that if their closet and index investors, these active management funds, which is actually a good point that you bring up. I've seen some, when people show me their portfolio because they know I'm doing this stuff now and they'll, they'll be like, hey, can you, can you take a look?
And the amount of times I'll find, yeah, like a broad based index or even like a specialized index that looks at like just tech companies. So they'll basically have like six index funds that make up the economy through like each sector being held differently. Yeah. Which dries up even more management expense ratios because these men, these particular index funds that study, uh, uh, a certain industry or you know, a certain type of strategy have a higher management expense ratio on the find every year. Then a broad based SNP or total market fund for sure. Yeah. And I mean, that's a charm. I mean, there, when people want to beat the market all the time and you know, fair enough, but it's, it's, it's, it's risky, right? Because you, you go with some of these funds and you know, they think they figured out a way to consistently beat it, but then in order for them to do that, they need to have staff, they need to have research.
You're going to pay you, they're going to charge a higher merx. So now you know, you're not, you're, you're fighting against these higher fees hoping that your trust in them is well deserved. Right. And, I mean, I don't know, to me it's a bit like, you know, fighting an uphill battle a little bit, right? I mean, yes, you can, you can win and there will be some winners for sure, but it's not like the odds are stacked with you, you know? So, um, you know, like Mia, I'm, I'm a broad based index investor, ice DePaul at night, you know, just doing it that way because I know when the history of the stock market, even when we have corrections, historically the market has always recovered. I, and I know there's the whole thing about, you know, the past not being a prediction of the future, that kind of a thing.
But I, I know that okay, since the stock market has, you know, started basically, right. There's always, even, even when we have certain blip, certain crashes, recessions, et Cetera, it's always been, it's always recovered, right. And I, I feel a much safer knowing that, uh, versus, you know, if you're picking an individual company and you're putting a lot of money, you know, on that one thinking it's gonna do great. While, I mean that it may do that well, but it may also completely crash and you could actually lose almost everything, sometimes even everything. Right. Whereas you're not realistically going to be losing everything if you do something like broad market index investing. Right. Cause it's not like all the companies are all of a sudden flowed. Yeah, exactly. Right. I mean the odds of that are pretty, I mean if that happens, you've got other, you've got bigger.
Well yeah. If your index fund goes to zero, you have way bigger problems then your investment portfolio being zero. It's which bomb shelter can I find because you know the world's about and that's right because that's right. Hundreds of businesses, they're somehow with $0 million now and that's a, that's like doomsday situation. So I agree with you. The one thing I will say, the one caveat, and this is what I try to accomplish with stratosphere premium. So Dva, bit of concept of what I do at stratosphere. Some I teach people through a course, a video course on how to get away from index. I mean, sorry, get away from mutual funds and start investing in index funds to eliminate those fees. And if you understand and want to learn how to read financial statements and understand the fundamentals of businesses and really understand mathematically why certain businesses have prospects to beat the market, and you do so with a discount brokerage service with extremely, extremely low fees, you do have a good shot of beating the market.
Um, not, not a, not a great shot, but you have, you have, you do have a good shot and people do it all the time. I mean, Warren Buffet did it, you know, for the last 80 years, right? So it's not impossible if you have the right strategy, but there's the big, but if you are a mutual funds, you need to go to index funds. And if you have not learned yet how to understand the fundamentals of business, read financial statements, then you best not be venturing into individual stock picks. So I think we're both aligned there. The End of index investing is the number one option, a rate out of the gate for 95% of Canadians. Um, when abouts did you come to that
inclusion? I think just by being in this field long enough, you know, after a while you can, you realize, okay, I can't remember the actually enjoy learning this, this thing, right? But this field and, and optimizing the investments and all of that. But I've learned after doing it for quite a few years, that you're not that most people aren't as passionate about it or they don't want to, you know, it's not fun necessarily fun for them to learn how to allocate investments for their retirement. Right. I don't know that most people aren't, uh, my knee geeks like, like, uh, like, you know, if I could, you and I are, let's say, right? And so, and so for a lot of people, I mean, I'm a, I'm a proud money gig. Don't get me wrong, it's a compliment, right? But what we know, most people aren't, you know, they, they, they have all their passions in their life that they would rather focus on.
Uh, they don't want investing to be another part time job that they do on top of the regular full time job. Right. And so I think, you know, for a lot of people in the index, investing is a really good option because yes, it does take some learning in the beginning, but it's the best return on your time invested anywhere really. I mean, you know, you learn, you spend, let's say a few days of intense studying, you know, how this works and how to do it and the fundamentals and I mean, you can be set for life. It's, it's, and I mean, as we're talking, you know, hundreds of thousands of dollars, right? Uh, if you, if you invest a lot, I mean, it can easily be in the millions, right? So it's a very good return on your, on your time investment on your time investment. But you know, but to your, to your point, I'm not saying index investing is for everyone either, right?
Like some people on the other end of the spectrum really enjoy this, right? They enjoy trying to find a good undervalued company. They in, you know, just trying to find sort of those, those bargains are companies that are poised for growth. They enjoy the, you know, the thrill of, of trying to beat the market, right? And they are, you know, some people, financial statements and annual reports are boring and they, I mean, you know, they'd rather do a million other things than that, but other people's that, you know what this is, this is fun, right? It's like a, it's almost like a game to them, a hobby and a passion, right? Uh, and so there's nothing wrong if, I mean, if that's your calling, if that's what the way your brain is wired to like Warren Buffet's as this a lot, right? How he was just the way he was wired to where he was born.
I mean, it made him just really good at this type of work. Right? And some people are just wired that way. And so if that's your, that's your thing, if that's your jam, uh, then for sure, you know, pursue it. And you know, when you, you could, you could definitely be successful with it. More successful than, you know, a boring a index investor like me. Right? Uh, you know, definitely you can definitely be very successful with that strategy. But I, I think what I caution people with is it's like, look, if you're going to be, if you want to be an active investor and you want to pick individuals tops, then then then then do, it's like if you're going to do it, do it right, put in the effort, put in the time, you know, make sure you actually enjoy doing this kind of thing. Right. Cause you're competing against people that actually do probably enjoy it. Right. And that this is a big thing for their might and this is how they make their livelihood. So it's kind of like, look, you're either, you're either going to take this seriously or if you're not well then just go to index investing and focus on whatever other thing you're passionate about. You know what I mean?
Yeah. And the thing is like, it's boring and that's probably why you were onto something, right? When it comes to financial markets, when something's boring and it's not sexy. But at the end of the day, like, like you said, the Roi on your time, like say you, so c is the average over the average lifetime of Canadian investor. They'll spend just a little over $320,000 in mutual funds fees. Some studies has. So if you learn how to do index investing in it, and so in this case you do my course, which takes three hours to do that Roi on three on three hours. If you think about it is insane. Imagine making a business and selling it three hours later for 300 k right. That would be insane. Like that. That's never, ever once happened in the history of the world. Sure. Yeah. I can't think of any
other area where you can put in that little time and get that much of a return on something. You know what I mean? I really can't think of a single thing because yeah, there's things you can learn and you can get big pay offs, but those payoffs, you know, sometimes they materialize, sometimes they don't. And it's not like multiples and multiples and multiples of your dime that you, you know, that you're, that you're earning, right. It's, it's uh, yeah. So I, I hear you. I think it's the best. I mean, I think it's a must to learn because I really can't think of a higher hourly rate that you can earn. Like if you break it down to an hourly rate, it's like, oh, so over your lifetime you could make, it could easily be in the hundreds of thousands, even millions if you're, you know, if you didn't do invest a lot. Right. So I'm in, how can you know where else? I don't think you can, you know, I'm pretty sure it's more that like brain surgeons make per hour. Uh, so it's f learnings is my, is my point for sure.
Yeah. So with an ETF index portfolio, and I recommend quest trade, I think you do as well, right?
Oh, 100%. Yeah. The free ETF buying is what won me over. And I've, I've been with them with since I started and I have no intention of switching just because the transaction costs are so, so low. It's fantastic. Yeah. It's like 13 cents with like the ECN fear. That's right there. All you get is DC. Yeah. You're basically being the ECN fee, which is just, yeah. So it, it's, it's like pennies, right? I mean it's, it's like under a dollar per transaction. Uh, yeah. I mean, yeah, it's always
no actual like commission with the exchange, like which has crazy with the ETF. So yeah,
Sal, but, but I knew is when you sell balancing annually, I mean, that's not going to break your bank eventually you retire and you're to be withdrawing more about, I mean you're, you're, you're still paying on the selling side, but if you go with any other broker, you're pretty much also paying on the selling side, but also on the wine side
and you're paying more on the cell, each transaction. Oh, probably. Yeah.
Cause I think they're like five bucks or something. Last I checked I, if I'm not mistaken. Right. Whereas quest rates four 95 right. Yeah. Whereas a lot of places are like $10 or they'll be like 10 bucks. Yeah. Like your first 50 trades free, but which has always kind of a little bs ish to me because like, it's like I don't care about, you know, like Oh, you get this many free trades for the first two months. And it's like, well look, I'm a day trader, I own with an expiry date. Right? Like I don't care about that. I want long term free tea of buying. Right. Um, yeah. And uh, I'm, I'll say too, I think it's a good, um, it's a really good thing for beginner investors as well. I should say neither you or I work for quest straight. Right. This is just, we both use it, it seems, but I w I mean, one argument that I've heard people use is, is all against know index investing in Etfs is, oh, well, it's not really worth doing yourself through a discount brokerage.
You know, until you have a big enough portfolio. Because if you're paying, let's say, $10 per transaction and you're not investing a lot, like, you know, you're just putting in a few hundred here, a few hundred, there isn't, you know, those costs really add up. But, but if you're buying ETFs for free, you don't incur those costs, right? So you actually don't need, you don't need like a, okay, I'm, you need to like $10,000 to invest to make it worth your while. Like, no, you don't. You can start it if you're completely new to this and you're naturally going to be nervous for the first time. So you could take, you know, $1,000 that can be your starting point. Uh, and you can just, you know, you can just do that and you can buy one ETF. I, you know, you can buy one ETF if you want, would that, you know what I mean? Like does, you know, for like $30 or whatever, right? And just to get comfortable with them, mechanics, get comfortable with how it works. And once you get comfortable with that, then you know before you know what you're going to get more and more comfortable the more transactions you do. And before you know what you're doing at $1,000 transact, you know, purchase, you know, $2,000, $10,000. Right. And it becomes, it becomes a, you know, it's not a new foreign thing to you that you're scared to do.
Right? Yeah. And you'll just be come so cough, like so comfortable doing it too. Once you've done it, you know, once you've bought one share, like once you bought one share on a discount brokerage, like go out and buy yourself a beer man
because you have just like, you've just done something that so many people will never do in their homes
life, which is crazy to think about. Right? Like so many people won't ever even buy anything on a discount brokerage and it's never been easier. It's never been cheaper. It's never been cheaper. Um, there's no reason to not do it.
That's a good point. It is actually a significant milestone I think. I think I should give it more, more credit cause because you're, and we'll see people don't do it. And if you're doing that kind of is, is what starts, it starts you off, right? It gets you, it gets you familiar, it gets you finally see, wait a minute. This is actually very straight forward. Once you know what your basics and then before you know where you're not buying one ETF, you're buying 10 you're buying a hundred right? And you know when it's, it's, it's great. I mean that's, that's what starts at all.
And when markets are down, I mean there's no real run to the panic button because you can't be pessimistic on like 600 companies, right? Right. Like you know, like how are you going to be pessimistic on the financial results of 600 companies? So it's easy for most people to buy more. Whereas if you own a collection of stock picks and one's down 30% and you're not, you know, that experience don't understand the core of business. You don't understand how to read financial statements, you're going to be a little bit can fused why this positions down 25, 30%. Like are you missing something? Is that something happened with the company? Blah, blah, blah, blah. So there'll be more susceptible to making mistakes and kind of following the herd mentality instead of acting like a contrarian investor, which most people should be.
I'm sure. Yeah. It's, um, yeah, it's, it's a lot. Uh, well yeah, once you get into the individual stocks, for sure you started, you're like, well, what do these people that you see it go down and you wonder what would they know that I don't know. Right. Or maybe that's not the case. Maybe it was just an emotional reaction and it actually is a buying opportunity. Right? Well, which one is it? Right? So you have to, yeah, so it's, it's a tough one, right? With like with the individual stocks, if you, I mean, if you get good at it and if like I'd be, if it becomes your craft, I mean, there's obviously a lot of money to be made and people have made very, you know, they've, they've been my returns by far, right. If, if, if you're a very good individual stock investor, we picking individual companies, but you have to, it has to be a skill that you're, you know, you're a very good ad that you're willing to train yourself on and master, right?
So some people I think are great at it and others are, you know, they, in that scenario where, what do, what do I do right? And they start second guessing themselves and, and maybe make the wrong decision and actually lose quite a bit of money. Right? Or as the guy that's just taking the easy index investing approach is all of a sudden beating them because they're not, they're speculating, they're not, they're second guessing themselves. They're just pumping money in letting compounding do its magic and, and you know, collecting, collecting their dividend checks in on the, uh, that or you know, the dividend, the deposits and then that's it.
That's, yeah, it's amazing. The yield on these broad based index funds is pretty substantial when you consider really what you're not, don't have to have any skill at all and you're going to receive cash right into your account. And that's like kind of how I get people hyped up in index funds. I'm like, just wait two months and you will actually just get money magically appear in your account. It's fantastic. Yeah. No,
very interesting. I mean like I have a international highly diversified portfolio. The yield on, it's probably around, that's a 2% right. Give her a give or take. Um, and what's in them. That's what most people are going to be. I think around there. If you're heavily invested in us, for example, like if you're, you know, s and p 500, let's say, you know, you're going to add plus some Canadian cause you're Canadian and uh, uh, you know, you're going to have some, some of that and international. So let, let's say 2%, but then you look at, uh, I don't know about, you know, US people bugging Canada for instance. You know, if you go to like a major bank and you have an account with them, a savings account, you're getting way under one usually, and you're kind of, you know, in your, in your account, right?
And so, and I get it, like it's stable, it's not going anywhere. That kind of a thing, but it's just interesting how you're getting under 1% there, but you're getting 2% yield on just a basic broad market index or getting that in yield just from the dividends alone. Plus there is going to be capital appreciation on that. Uh, you know, there's going to, capital gains are going to be getting off that if you hold a longterm realistically. Right. Um, so I mean, it's, it's, it's amazing the contrast right, where you're getting, you're actually getting these cash distributions that are more than what you're getting. And I know there's like, you know, there's a whole risk and volatility piece, but it's just interesting. I, I personally find that very interesting how you're actually getting income and capital appreciation versus just getting something under 1%.
Yeah, it's so interesting, especially when you compare, you know, a 10 year bond to the dividend yield of a broad based index. And when markets are on a bit of a discount, they're pretty much on par. The yield on the 10 year and the, and, and the yield on a, a broad based index, which is so bizarre to me because it's fixed income has no real upside, obviously with capital gains. Right. Which brings me to a important question around volatility and then wealth protection. Maybe when you're nearing retirement and you're gonna need that money, you don't want to be susceptible to market swings when you want to be a drawing on that money. But someone who's in their twenties, thirties who has a long investment horizon. Um, you know, some people prefer to have bonds to stabilize their portfolio. I say if you're under 40, I mean a lot of people disagree with me that you don't even need bonds in your portfolio at all. I mean, there's lots of it as well. Yeah. Like there's no reason to, I don't see any reason to, unless you need to withdraw on your money and stabilize your portfolio because you're going to be withdrawing on it. Why would I own a bond?
Yeah. And I mean the, the, the argument you'll hear on that is, okay, well, and that's a fair one. And since the whole going to risk tolerance piece, right, and if that person's all equities but they don't really understand how it works, they don't understand the cycles of the stock market and how yes, we are going to have corrections, you know, and then the recessions and all that, you know, some people who just kind of jumped into it before they were truly ready or fully understood the whole scope of everything. I, you know, I can see some, you know, panicking, freaking out, feeling, okay, the sky is falling, let's just sell before falls on the lower right. And that's what a lot of, sadly, that's what a lot of people do. Right. Um, so that's kind of, I think the, you know, there are some people that just seem to have, uh, temperaments where they, maybe they can handle that, um, or you know, but I find a lot of times too that can be helped by education.
Right? Um, I think if, if you, if you learn enough about, you know, the cycles and how the markets have historically always recovered and you show them the longterm trend and I think people can weather the storms a lot better than you know, than if you don't show them that. So, um, so it's interesting thing, but I mean, I, I hear you, I like saw that saying, yeah, everyone should have 100% equity portfolio of their under 40, but, uh, I'm under 40 and I'm 100% and I don't, and I can't see, you know, and I, I'm, I'm very, and I'm, yeah, we recently had a correction in the markets and all that, and, you know, they're not, but yeah, I mean, I mean, that's just, that's just part that, that's part of what happens, right? It is what it is. You, you hold it out, you write it out. Uh, I mean, that's, that's to be expected. Exactly. Right. If you view it that way, right. And, uh, sort of dollar cost averaging. Like if you're still working, you're having income coming in every two weeks. So put a bit of thing aside, put it in. Well, now you're buying it out of buying up. We know when it's a buying opportunity. Right. Um, but by, by the ETF swap when they're on sale. Right. So, um, yeah, I don't know that, that's my 2 cents on that.
No, no it, it's, we're completely aligned on that because I don't understand the appeal of a bond when I can get dividend payments in something even as safe as a broad based index fund that holds hundreds of companies. I'm sleeping just fine at night when the markets are extremely volatile. So I know as you, as you mentioned like yeah, get paid every two weeks and then just kind of pay yourself, may put it in your investment portfolio, throw some money into quest trade by ETFs. How did you becoming an investor change the way you looked at your own finances? Because I remember when I started investing three or four years ago now I would like spend a dollar, you know, I would be like by a couple of beers at the bar and I'm like, Oh man, that could have been like one share of VCN or like, yeah I share of the, and I mean I'm not that crazy about it anymore, but like great. When you're learning about it, these are the kinds of things are you looking, you're thinking about and those tickets straight to them listing or just the a the u s market Vaun and Vcn, there's the Canadian market. But these are the kinds of things I was talking about is a bit crazy. But thinking about, sorry, but how did that affect you? Yeah, so, so I, I had the
exact same experience and that's kind of how I see things now. Even as well, right? Where it is, it's all kind of viewing any spent mind. Yaz as opera, we're looking at everything in terms of opportunity costs, right? Where basically every significant expense that you incur is Ms. Dot returns that won't generate you thousands of dollars in the future, right? So that's kind of the way that they look at it. And then that kind of, I thought of a sort of a good example, right? So let's say that, um, you, like right now we have a very like not, not fancy car at all. It's like a, let's say a $10,000 a car, right? So let's say you could say, okay, well I, you know, we can afford a let's, let's get $1,000 car, right? So, you know, we traded our $10,000 car, we put in 20 k, you know, in cash, right?
There we go. We've got ourselves a $30,000 car, you know, wonderful. But then the way I kind of view things like that now as I see, okay, but what if I, instead of doing that, what if I kept the $10,000 car cause it's fine and I instead invest that $20,000 that I would have spent to upgrade the car, right? Um, well over 10 years, assuming a 6% return, that $20,000 would be worth almost $36,000, right? Because of compounding. Right? And that's, and I'm using a 6% rate of return, which is a neat, which is relatively conservative, I would argue. Right? Um, so, so in other words, you know, you, you, we see you would easily the earn almost 16,000 extra dollars by investing that money and just keeping your own car an extra $16,000. Right? So like, think of how long you have to, how many hours you have to pull at your job to earn $16,000.
I mean, not, it's, it's, it's a lot of work, right? And here you're doing it, doing almost no work just by not upgrading and just investing that money, which, you know, is easy, right? Like it's, it's maybe a wall, like it's, it's less than an hour of your labor, right. To earn, to earn the $16,000. Right? So it's not, and, and I mean, and not just me viewing it over, uh, you know, over a 10 year period. Right. Um, so that's kind of the way that investing has changed me, right? As I'm not seeing that new car as a $20,000 expense anymore, I'm seeing it as a $36,000 expense because I want to factor in what, okay, what could that money have earned me instead? You know? Um, and I know what, take a simplified example, cause it could be like, oh, we could resolve a car and, you know, maybe the new car last song or a fancier car last longer.
Right? But so, but still the bottom line is even if you discount the savings a little bit, bottom line is you're still saving, you know, tens of thousands of dollars or you're making an extra tens of thousands of dollars doing almost nothing. Joe's by not buying something that's not going to appreciate, it's going to depreciate. In fact, you know, and buying something that's worthwhile. And I mean, over 30 years, that 20,000 would become almost $115,000. Right? So I mean, that's not right. 30 years, that 20,000 becomes almost $115,000. Right? Um, so that's an extra $95,000 that you have now extra in your pocket because you decided to invest that money over 30 years. Right? So I mean, that's, that's nuts, right? So you can't just view a car as like, oh, it's just 20 k. It's like, well, it's not because one, it's after tax money, which, so you actually have to earn, we spent, you know, make a lot more than not because it's right.
So there's the tax piece and if you instead invested it, which you could be doing. And tax advantaged accounts as well. Right? Like it could be, you know, putting it into tfs say are the RSP, you know, the further tax. I mean there's, it's nuts, right? I mean, so tens of thousands of dollars. So I kind of view things, um, sort of, you know, kind of like what you did right. Where, Oh, I could have bought this much. I could have bought V and other Vu and, but instead of bought it online, spent it on like a few beers when I went out kind of thing.
A plain Buzzeo cart that we're playing. Buzzeo cart busy your card. This is the game we were talking about offline. [inaudible] car, Mario Kart to drink the beer. Drink and drive the beers. Yeah. Yeah. I forgot. I forgot the official name. I like the beer is Mario Cart thing. Yeah. I like Cornell. We were talking about this like half an hour man. Cool. I remember, I remember I just got this cart open yard time. So you're in your thirties and your yeah. Retired as, as it is. You're not looking at your day job anymore. Um, and I know the concept is kinda called fire. What is it, like financial independence, retire early. I'm new to the whole concept and it's basically being, you know, very frugal and investing your money when you're young, um, to kind of meet a magic number of what you, what you think you need to live on for the rest of rest of your years. I mean, that's obviously worked all for you. And do you want to just talk about how you kind of understood this concept and, um, how you were able to maybe make some sacrifices in your lifestyle to achieve that, but here you are. Yeah,
so I mean, we, like right now, like when we hit our kind of magic number right where we could, where we basically had financial independence, um, we, we both quit her job. So my wife now she's a full time stay at home mom. Uh, essentially. And then I still work part time. I wasn't really, you know, I'm not quite ready to, to sort of hang up the hat this or sort of speak. Um, but I still quit. You know, when I hit that number, I still quit the job. And, and then the question became more about, you know, what, what I like to do a where you're not picking the job just because, oh, it pays more. You know what I mean? It's so, so the, the way you make decisions I find is just, it was different, right? It wasn't so much about which place is going to pay me more for rope for them, it was more what would I like to do, what skills do I want to develop or make me happy?
And then you make a decision based on that. And if it turns out that doesn't make you happy, then you just switch and you have the freedom to do so. Right. Um, so I mean, that's kind of my, my definition is of of, you know, financial depends, very earliest having enough money where you don't have to worry about money anymore. And so you can make decisions in your life based on how much don't make you and other people happy. Uh, you know, instead of how much money it'll actually make you. So like right now, I still work part time. Uh, and it's great. I'm going to keep your brain fresh, still learning, still developing. So I mean it, it, uh, to me I find it like work actually, you know, it, it can make you happy as long as, as the kind of work that you want to do and that kind of work that fulfills you, uh, you know, keeps you challenged, keeps, keeps you growing as opposed to work where you don't want to do it, you don't enjoy doing it, but you have to because you've got to pay the mortgage.
You know what I mean? So that's kind of the way I look at it. And I mean, and it used to be that I thought the whole financial dependence thing is just having enough money so you, you know, you lay on the beach and just don't even lift a finger and don't do like a single productive income generating thing in your life. But what I kind of later learn is that, you know what, one person considers work and other one doesn't. Right? So one person may love working on their car or they may love gardening, whereas another person sees that as work. Like you, you'd have to pay them a lot of money to do that cause they, they really don't want to do that. Uh, so it's just kind of, so it's an interesting thing, right? Cause I think people sometimes get caught up and it's like, oh well this person has already retired.
They're working. And it's like, well, you know, it depends, I think how you, you know, how you define work. So I think, you know, financial independence, retire early is more so about sort of having the freedom and the option to do so, uh, and, and pick and choose and change as you see fit as opposed to just doing it. Because if I pursue my real passion, I'm going to make less money, at least in the short term, and then I won't be able to pay the bills and that's going to ruin us financially. Right. They got, that's kind of the, the big change I would say. Um, yeah. So I don't know, I mean, I mean, yeah, that makes a lot of sense. Does that answer the question?
Yeah, it answers the question perfectly because it kind of really unlocks freedom. Yeah. And gets you in a place where you don't, you don't have to trade time for money. You still can, but you don't have to. I think that of that, that freedom is kind of really what it's all about for sure. Um, yeah, I know. And that makes a lot of sense to me and I think a lot of people would love to eventually get to that boat. So that's why if you're listening to the stratosphere investing, flawed cast, maybe you're on the right track. There you go. Yeah. Cause you know, it wasn't an interesting
kind of Aha moment because like we hit that number right. And then I started getting gravitating towards things I enjoyed and then I learned, you know, like I enjoy marketing. For example, right now I enjoy podcasting. And so, uh, you know, like I have my own podcast as you know. And so I just, I noticed, wait a minute, the things I'm enjoying doing that I'm grabbing towards actually do also make money. So That's interesting. And then I started looking at other people who I know are, you know, who could, could retire as well. Right. Uh, so I, you know, I read different blogs of people who have kind of achieved this early on, like in their thirties as well. And they all still do things that some people would see. It would define us work like to them it's not work, but, but to them, like to them it's not work, but to other people from the outside it seems work.
Right. So it was just interesting how people that even have enough money and don't have to work, continue to work. Right. Like, why did Oprah continue to work? Uh, you know, even though she, you know, she had enough money to not, you know, to not work long, long before she stopped doing her show. Right. Uh, like Ellen degeneres has just did like a new Netflix special. Right? She clearly doesn't need the money. Right. And so some people will be like, oh, well she's clearly still working well. It's like, well we make see that as work, but maybe that's just, she loves doing that. She loves doing standup. So that's why she does it. She's, I doubt she's doing it because I'd be, I'd be shocked if she was doing it for the money because she's, you know, had that show forever. And so she's, it doesn't have to really worry about it. Right. So I guess complete freedom. She can actually donate some of it to me if she wants.
So I'm by no way comparing myself to those people, but I just, but people in the financial, in the fire community, I noticed they all do things that some would consider world that generates money. And even people like, you know, like certain celebrities that I see, they continue to work, right? Uh, well people would consider work, but they just do it because they love it. So that was like a big Aha moment for me. So I did. I thought I would share that because it's easier to just have this dream of like being on a beach and doing nothing but that actually isn't sustainable and eventually you're going to want something else. Um, so it's important I think to factor that into your life projections or life plan or whatever you want to call it.
Right? Maybe, maybe upon celebration you head to the beach and a all inclusive drink your face off for a week, but then after that, after that it's going to get a little depressing. I would say.
Well that's the thing, right? You can only do that for so long and for sure you're still going to do that, right? Like to celebrate or have your downtime, but you're not going to do that for the next 30 years. If you retire at 30 you're not going to do that for the next like, you know, for like decades and decades. Just doing that. I mean, that's going to get old really fast. We'll probably end up getting depressed out east at least I would definitely, definitely. Yeah.
I, I enjoy doing that for you. At a time period of time to kind of relax. And then it's like, sure. It's like, okay, I am ready to go back to it. So I want, I want to be able to make a, this is actionable for someone who's listening. Um, before we, before we, uh, head off here, so I'm going to list my three favorite index funds or ETFs that people can buy on quest trade completely for free with a couple of ETFs. So my personal three favorites for stocks to own the entire world, pretty much with three picks. You can own VCN, you'll own the entire Canadian stock market Vu and you're going to own the entire us market, SCF, you're going to own European, Japanese, Australian stocks. And then I'll actually throw in a fourth phone as well, e which is, uh, the emerging markets fund. So with all four of those, you're looking at a management expense ratio of less than 0.2% and a VCN like 0.05%. When you compare that to two and a half percent with a mutual fund, that's essentially 40 in the grand scheme of things. Um, and I'm interested what, which funds you use and which ETFs you use.
Sure. Yeah. Um, so I recently switched things a little bit for my us portion, but when I first started and for the first several years, um, I mean very, very similar to yours. I used, um, I think more of the, I shares one, whereas you seem, it looks like you used more of the, the vanguard ones and I mean both. I am happy with, like I would have, I would have no issue, you know, picking a one versus a, you know, picking Vango versus I should, I think they're both great. They're all, you know, they're, they're following along with a lot of these, right? They follow the same index and they're just like, basically once one lowers their fee by little bit and then the other one matches or lowers it a bit more and they were just fighting it over. So, I mean, they're very comparable products.
Um, yeah, so for me it was, um, so I did Xic for the Canadian, for the Canadian index, essentially. Um, I did von or via V for the US. And then I did ECCC annex for the international components. ACCC is the emerging markets you have is the international developed. Um, so those are basically the ones who it was what, one, two, yeah. So basically for, for ETFs. Um, and then what I recently did just to optimize things had been more from the taxation perspective and this is more of an advanced thing. So if you're just getting started, just ignore me for now. But if you've got a pretty sizable portfolio, um, or with a sizable us, the portion. Um, and then what I actually ended up doing is I ended up buying Vti, which is basically the, the total us market, but it's on the US exchange.
Um, and if you, what's actually in US dollars? And so if you hold it in your RSP, you save some money basically on the withholding taxes. There's like a tax treaty that exists between Canada, us. It's kind of complicated. So like this is kind of beyond the scope I think of the episode. Um, by basically what you'd you buy I started doing recently is instead of know for my Rrsp at least, uh, I would get Vti um, and I would use no Norbert's gambit to basically get the, to get to pay as little a currency exchange fees as possible cause you have, you can only buy this in US dollars. And then that way you get some sort of tag, you get the bit of tax efficiency because the US isn't holding back some of your dividends, um, through taxation. So that's kind of, yeah, a little bit more complicated probably, but I mean, if you're kind of been investing for a while and you're looking to tweak your portfolio to optimize it a bit more, I'm definitely look into that, you know, but holding Vti in your RRSP instead of something like, you know, Vu one for example.
But you know, that's more like phase two. Phase one is, yeah, I just view on as great, uh, like I, uh, it's fantastic. I don't know a lot of those. Same with know via v. So, um, yeah, I hope, I hope that, uh, that helps.
Yeah, that makes perfect sense. I've flip flopped between VFE and Vu and what you recommend because at the end of the day, Vu ens market cap weighted, so it's pretty much the exact same as VFE and he has a lower expense ratio. So I mean that's probably even better actually because it's, you're going to be looking at putting much the exact same fund that will be less holdings and VFE cause it'll just be the 500 biggest ones. But at the end of the day view and would be off, I'm going to go out a limb on a limb here and say like over 90 to 95% would be weighted into those top 500. Anyways. Yeah, I
mean the, I remember reading that trying to, we're trying to decide between the two. Uh, you know, back before I started just doing know Vti and kind of the big thing was, okay, one is SMP 500. Um, so whereas the other one is total you a stock market, right. So the kind of arguments that I've heard was, okay, well if you're doing SNP 500, you're going to get less of, but maybe a bit less volatility because the 500 or bigger companies, they tend to be less volatile than some of the small cap companies out there. Um, so that's kind of the benefit you're getting with just going with fight with the SMP 500 is you're getting a bit more stability was the, is the common argument. Um, but then with the total stock market index folding now on instead you long term you may have a bit more growth because you have more smaller cap companies that are going to, you know, and, and historically they cannot, they tend to grow faster than these bigger companies.
That's, you know, so that was kind of the, you know, the arguments that I've heard of between the two. Uh, you know, the conclusion is that, in my opinion, you're going to be fine with either one for your us allocation. So I wouldn't totally, you know, sweat over it. Um, I mean it's, it's like a common debate and the sort of investing circles, you know, which one is better, but you go total stock market or do you go SNP 500. Right. And I mean, we're the, if you're getting, just getting started, don't, don't, don't sweat this at this point like this. It's such a minor thing. Just get started already.
Really. It's negligible for a beginner like Oh, 100%. Yeah. You're not going to see really any difference in the most and like the grand scheme of things, the biggest part is that you're actually executing on buying these ETFs. Um, oh, 100%. It's big enough celebration right there. Um, I think, I think it really doesn't matter that whole much back to taxable accounts though for Canadians, if you have a taxable account, I know that horizons has a ETF that doesn't pay out the dividend. Yes. Um, I forget what that ticker is right now. They have a few, uh, so they, they have a few ETFs and several of them are kind of under that structure where they basically, they don't issue those dividends. And so instead that kind of gets rolled in to your like capital gains for example. So it is a thing that can be tax advantageous for some people.
Yeah. Cause they'll just roll it up into the net asset value of, of the ETF. Yeah. Which, which, which is helpful because then you're not going to pay, you know, double tax on dividends. But again, this is, this is getting into the weeds now. Yeah. For the most part, broad based index funds, um, I've written a thousand people have written on which ones to buy and which ones are the lowest cost. But yeah, for the most part vanguard and I share is just kind of duel it out year after year, soon enough they're going to be like 0.01 every single one. Like how low can they go at this point? Yeah. Yeah. Well it's interesting, right. And then you've got, um, yeah, no, it's, yeah, I mean it, it's kind of like a race to the bottom and then now they're kind of, I think I know when to
you as they started experimenting with doing zero cost ETFs because they have some, you know, and so they try to make money off you kind of on the backend and in, in sort of different ways. So we, you know, sort of like a, you know, almost like a, you know, they use that no, no fee ETF to try to get you in and get used to, you know, set up and get you liking their brand and their group of ETFs and they try to monetize it in other ways. So it's, so, it's interesting. So it may, it'd be interesting to see if that happens. There's happening in Canada. What event you, they're just like, I forget, I forget the fees. Just like, you know, come on, come on in for free, but we're going to try to monetize, you know, get some one, has it been going through a different channel but, but right now there was so low.
I mean it's, it's, it's fantastic. I like how it's not like this sound like you have to spend days, you know, comparison shopping, you know, it's like, look, if you want to follow the broad market, you know, here it's like here's the vanguard version, here's the I shares version, you're probably going to be fine. No matter like, which, like I would feel comfortable picking one or the other for the broad market index. Right. It's not like a, and their fees are probably the same and if it is different, it's going to be by some negligible amounts. So 0.01 or something. Yeah, yeah. It's going to be nothing. Right. So like, like it's, it's, it's an, it's a relatively negligible amounts. So I don't know. I think it can be dangerous for some people getting started who, you know, you, you kind of get hung up on what GTF to do and it is important, which CTF could do, but it's not like, oh, this one called their fees by this, like extremely minuscule, insignificant amount. So should I switch all my ETFs to that one? Well, no, it's, it's, you know, it's going to be like, you know, like $10, let's say over the course of, you know, on your portfolio over the course of a year. Like kind of let that hold you back or stress you out. I mean it's, you're going to incur that fee to transfer it. That's right. You're going to pay fees to transfer and odds that chance. Exactly. Exactly right.
Time. Yeah. And then, and then you do that and that you switched to the I shares and then the next year you'll be like, shit, I actually had, especially the other one, cheap one this year. It's time to switch it all. Yeah. So at this point, yeah, no, I, those are the ones that I originally bought and when I learned this strategy and Vu and I think that year had just come out like 2014. Um, and yeah, I haven't even blinked an eye at this point. I know that there's still the low ones, so yeah. And I don't sweat the small stuff. This is a million and a half week things to be more concerned about than that.
For sure. I mean it's, it's kind of like the whole, uh, what's that expression? The missing the forest for the trees, I think or whatever that expression is. You know, it's like, it's easy to get caught up in the weeds and then be like, okay, well, you know, or, or you or you're trying to decide. So it takes you an extra, you know, three months to actually invest because you're trying to figure out that out. And in those three months you just missed out on dividend payments who would have received, if you just invested it, you know, right away, you know what I mean? So, uh, annual could have had those, you know, could have had those dividends coming in and you could be, now we're investing those, we're spending them or whatever. So, uh, yeah, it's, it's, uh, it's, it's worth cautioning people not to get too sort of caught up in some of those things.
Like, I mean, the larger your portfolio gets, the bigger impacting scan have, right. Because a lot of times I find in this, you know, when comes to the investing where a lot of things aren't sort of percentage based, right? So if your portfolio is $10,000, you know, a, uh, like a percent of a percent kind of thing is as minuscule, right? It's, it's insignificant or as if your portfolio is $1 million, some of these things start to matter, right? And that's kind of one of the reasons we started. You know, I ended up transferring to Vti, which is basically like the equivalent of the UN, but it's the newest currency. It's on a US exchange, you know, because of a tax optimization reasons. So for somebody with like a, you know, relatively small portfolio of getting started, you know, the benefits you experience are going to be negligible, right?
But once you portfolio gets higher enough, that's when you're started kind of, you know, you start doing these little tweaks because yeah, you know, maybe you know, a bit of a, you know, a fraction of represented and make a big difference when your portfolio was 10 [inaudible]. But when it's something like a million, you know, now those things actually matter. Right. Especially because, you know, and you think you saved cannot be compounding cause you can reinvest it, et cetera. So, um, so that's kind of one thing to keep in mind I think. For sure. Yeah. No, definitely. Um, what can we find you online here was the quickest way to get a on the build wealth. Yeah. So just go to build wealth Canada. Dot. Ca and you can go there, you can sign up, you'll get told when you episodes come out. We do all kinds of giveaways.
I'll have authors on the show and you know, you can go on like signed copies of their book. We found other things where we had once where there was a, like an iPad being given away. I think it was like, there was some, you know, from one of the sponsors, like we had some pretty, pretty cool stuff. So yeah, you can, you can go there. A signup to the list that will be told when you episodes come out and you'd giveaways, new guides, uh, things like that. And, uh, yeah, I'm, I'm, I mean I'm sure the listeners will get a lot of it. I mean, I basically, I interviewed the top personal finance and investing experts basically to help Canadians. Right? So it's, it's very much to help Canadian specifically. Uh, cause I find, you know, there's a lot of times Canadians are being a little bit underserved right now.
There's a lot of great content in the u s but then you start kind of learning, these people are saying, oh, Roth Ira, an IRA, four zero oneK , right? And you're like, okay, I'm a Canadian, we have something similar. Like we have RSP FSA, there seems to be a lot of celebrities similarities. But I, you know, does the strategy applied to Canadians? And it's just this, so you're never sure. Right. Uh, and so in my case, I focus pretty much exclusively on, you know, Canadians. Right? And, you know, does this strategy help Canadians does, you know, that's where, that's where I live and this is, and the things that I suggested are things I do and to my own portfolio. So, um, yeah. So I know. I hope you check it out. Yeah. It's a build wealth Canada dot. Ca. Awesome. And that will be linked in the show notes all so much for coming on Cornell. Yeah, they serving me on. It's been a, it's been fun. Cheers.