My Journey to Passive Index Investing – Part 1

“If I were you, I would check out ETFs”.

And that’s how it started.   An idea was planted in my head.   A little nudge from a friend of mine.   This was back in 2009 when ETFs were not widely known.   I had never heard of the term before, and I did not know much about investing apart from hearing whispers that I should just go to MD Management, hand over my money and let them “handle it”.

I was just finishing up with residency/fellowship and was about to embark on my first staff physician job.  Since my pay cheque was about to dwarf my resident’s salary, I’d figured that I should probably know the basics about investing, so I asked my friend for his advice.   At the time, he was working as a financial advisor at Bank of Montreal (BMO) with “high-net-worth clients” (portfolios over $1 million), thus he seemed like a good resource to start with.  Looking back, I am extremely grateful for his honesty and transparency, as he could’ve easily recommended me to hand over my money and let him “handle it”.

I asked him what he recommended to his “high-net-worth clients” to invest in.   His answer: BMO mutual funds.  Made sense, since he was at BMO.

Then I asked him what he invested his own money in.  To my surprise, he invested his own money in ETFs and did not hold a single BMO mutual fund.  I had always thought that “wealthy” clients had access to the “best” investment products, so naturally, he would have done the same.

What???   I was confused!

Paraphrasing his answer:   “At the beginning of each month, financial advisors are told to recommend specific mutual funds to their clients in order to meet quotas, which in turn results in bonuses/commission fees.   The funds usually have a high MER (2% and above).   It lines my pockets and the bank’s pockets.  If I were you, I would check out ETFs”.

Looking back, I realize my friend was not your typical financial advisor.  He enjoyed reading books on personal finance/investing topics and was quite knowledgeable about investing.  Needless to say, he became disillusioned with the banking industry with all the sales tactics and the commissions and quotas driven nature of it all.   Not long after our conversation, he left the banking industry to pursue a career in a different industry that made him much happier.

To this day, every time we meet, I thank him for that conversation from many years ago.  That brief glance into the world of financial advisors and the nudge to “check out ETFs” started me out on the right path.

Meeting different financial advisors at different institutions over the years,  I’ve always received the same answer when it comes to their own investments.   Some may invest in ETFs while others invest in individual stocks, but they DO NOT (or very rarely) invest in the same mutual funds that they recommend to their clients.

This phenomenon is akin to physicians who prescribe medications to their patients while getting kickbacks from the pharmaceutical company.  Meanwhile, they themselves would never use the medication.

Does this make sense to you?   It shouldn’t.  It is a conflict of interest.  Don’t believe me?  Ask your financial advisor next time you see them what they invest their own money in.

This is essentially how my journey to passive index investing began.   Hopefully, reading this and an upcoming post will be your “nudge” to think about learning to manage your own portfolio.  Nobody cares more about your money than you do.

Managing your portfolio via low-cost ETFs (couch potato investing) is not time-consuming or hard to do.  Don’t think that you are alone, and don’t succumb to the scare-tactics by financial advisors.   There are other physicians like myself (see Loonie Doctor), who also manage their own portfolios, and are doing well.  The world did not end.

 

Are you a passive index investor?  What made you become a passive index investor?

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9 Comments on "My Journey to Passive Index Investing – Part 1"

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Loonie Doctor
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What a great story. It was fortunate that your friend was so up front with you about it. I took a longer more expensive route to figure it out. That said, I have learned valuable lessons and now managing my own portfolio is not only easy and empowering, but also pays more per hour than anything that I do in medicine. By a long shot. For those who don’t want to put that effort in, it is vital to find someone whose pay incentives are aligned with your success rather than their sales.

Dr. MB
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I am starting VGRO in my kids’ TFSA. What an amazing option for Canadians. I love Vanguard and Blackrock ETF’s. Let’s hope more docs will read what you and Loonie doc have to say. You guy show more stats and are more detailed while I am much more a “big ticket item” person.

The biggest determinants of success for all these buy and hold portfolios are:
1) keep MERs extremely low, definitely below 0.5%
2) keep taxes low- use your RRSP & TFSAs
3) whatever strategy you decide on- STAY THE COURSE!!! (Easier said than done I say)