My Journey to Passive Index Investing – Part 2 (AND Free “Millionaire Teacher” Book Draw)

After reading My Journey to Passive Index Investing – Part 1, you may think that I have it in for financial advisors.  I don’t.   I believe the majority of financial advisors truly want to help their clients, but either their hands are tied or they have misguided beliefs.

The way financial advice compensation is structured creates a situation which, unfortunately, benefits the financial industry more than the individual investor.   There are also some financial advisors who truly believe active management beats out passive index investing over the long-term, despite high commissions/MERs and strong evidence which says otherwise.  Stay away from these financial advisors, since they have “drank the Kool-Aid”.

I believe a financial advisor, with a CFP designation, should have a fiduciary responsibility to create a comprehensive financial plan.  This includes insurance, estate planning, portfolio management (using low-cost ETFs/funds), as well as “holding your hand” during the inevitable market corrections.   How much is that worth?   This is a difficult question to answer. I don’t think it is worth the typical 1-2% in fees, which most banks and financial firms charge, especially if you have a large portfolio.  With the implementation of “Robo-advisors” and financial advisors that charge flat-fee or hourly-based (not tied to commissions on products), consumers are now beginning to have more choice for financial advice at a lower cost.

As you may recall, Part 1 ended with me as a newbie staff physician in 2009 with little financial knowledge and an idea planted in my mind to “check out ETFs”.

It wasn’t until 2010 when I came across an article in the Globe and Mail, by Rob Carrick, where he rated the best personal finance blogs of 2010.  One of the blogs caught my eye: “Canadian Couch Potato”, written by Dan Bortolotti, which has been the best resource for index investing in Canada.

Through CCP, I came across another Canadian personal finance blogger by the name of Andrew Hallam, and his book “Millionaire Teacher.  The Nine Rules of Wealth You Should have Learned in School“, which was originally published in 2011 (updated in 2017).  Hallam’s book is worth the price of admission,  since he has read a ton of personal finance/investing books, and has summarized succinctly in his book.  If you still have doubts whether passive investing beats active investing over the long-term those doubts will be put to rest after reading Chapter 3.   Physicians practice evidence-based medicine because research backs it up.  The same concept should apply when it comes to investing. The enormous amount of evidence in favour of passive investing is, in my opinion, equivalent to a “Grade A” recommendation in evidence-based medicine.


I have read my fair share of excellent finance books/blogs, but everything that you need to know about personal finances and index investing in Canada can be essentially found in these 2 resources.   If you read Hallam’s book and CCP’s blog (in particular his “Model Portfolios“), then you will:

  • Know more than the majority of financial advisors out there

  • Understand that the #1 determinant of your long-term investment returns is your asset allocation (%stocks: %bonds)

  • Understand that the #2 determinant of your long-term investment returns is to keep fees/MERs low by using low-cost index ETFs/funds, which will outperform the majority of actively-managed funds

  • Understand how to manage your own portfolio with low cost ETFs with minimal effort/time 

     

If you spend a bit of your time with these 2 resources, then you will eventually be able to save 1-2% MER each year by managing your own portfolio.  1-2% savings on a $1 million dollar portfolio will be $10,000-$20,000 per year, every year, for the rest of your life.  That is a considerable amount of money which can be used on your family instead, such as taking 1 or 2 nice family vacation trips per year.  For the equivalent amount, how many hours would you need to work at your job?

Once everything has been set-up, you only require 30 minutes per month to manage this portfolio.  It really isn’t that difficult, as Loonie Doctor explains. However, taking that first step to managing your portfolio can be frightening and may fill you with self-doubt.   Comparable to a medical student learning a new procedure/skill – “See one, do one, teach one”.  These 2 resources will help you with the “See one” part.  At some point, you will need to take the plunge.   Follow that with sharing your knowledge with others, and you will become an “expert” in DIY passive index investing.

A point I would like to mention is the “law of diminishing returns” when it comes to learning about index investing.   After a certain point, any additional time spent learning about the nuances of index investing will probably not result in better returns, and may, in fact, cause analysis paralysis:

  • You may encounter analysis paralysis when choosing which ETFs to use.   Keep it simple with a 3 or 4 fund portfolio.  If you want to “slice and dice” (tilt towards small caps, value, REITs etc…), then realize that you are adding a layer of complexity to your portfolio with no guarantee that your returns will be better over the long-term.   If you enjoy this process, then go for it, but if this gives you headaches, then keep it simple with a 3 or 4 fund portfolio

 

Tools to get you started:

Keep track of your annual returns by using 1 of the following:
  1. XIRR Excel Function.   White Coat Investor has a good explanation on how to use it

  2. Justin Bender and Dan Bortolotti have a downloadable spreadsheet to help you track it (you will have to submit your e-mail address to get access to it).

Keep track of your asset allocation by downloading CCP’s spreadsheet.

At the end of each month, update your CCP asset allocation spreadsheet.   This will automatically calculate which asset you need to invest money in, and help keep your emotions in check.    When markets go up, your spreadsheet will “force” you to buy bonds, and vice versa, to maintain your asset allocation.   Keep it simple and rebalance with “fresh” money from monthly savings into one or two ETFs each month.   You do not have to maintain exact percentages.

I found Andrew Hallam’s blog helpful when I first began index investing because he posted when and why he bought stocks or bonds based on his asset allocation and what the markets were doing.   Since his own portfolio was 7-figures, his stock/bond purchases were in the tens of thousands (sometimes in the hundred thousand) of dollars, which are similar to a physician’s stock/bond purchases if they were managing their own index portfolios.

Check out 4 of Hallam’s posts from 2012 that illustrate his thought process and the simplicity of rebalancing an index portfolio:

Rebalance 1

Rebalance 2

Rebalance 3

Rebalance 4

If you made it to the end of this blog post, then Congratulations and Thank You for your attention!  I understand that for some people, this topic can be boring and dull.   I know that my wife would’ve stopped reading after the 3rd paragraph (she said title),  but had to suffer through it all since I required her editing skills.

I firmly believe that passive investing can positively change a family’s financial situation significantly over the long-term.   Often, there is 1 partner in the relationship that takes control of the family’s finances, either by choice or necessity.   Maybe that is you.  Hopefully, this post will help, or at the very least, nudge you towards learning more about passive index investing.

As I have stated before, “Nobody cares more about your money than you do”.

 

I am giving away a free copy of Andrew Hallam’s (updated 2017) book “Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School”.  Andrew and his publisher have generously donated a copy of his book to this blog.

 To enter yourself in the drawing for this book, please comment below and mention you want to enter for the book draw.  I will pick 1 lucky winner on Wednesday, March 21st, 2018.   I will contact the winner by e-mail, therefore, leave a legit e-mail address in the comment form.  Good luck!    

Book draw is over.  Thank you to everyone who participated.  I decided to donate another copy of this book to the draw, so we have 2 winners.  Congratulations to C. Huang and JLO!

Please follow and like us:

31
Leave a Reply

avatar
16 Comment threads
15 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
16 Comment authors
Dr. NetworthDr. G.LuizNateDr. D Recent comment authors
  Subscribe  
newest oldest most voted
Notify of
Dr. MB
Guest

Hello Dr. NW,

Please all docs need to read this stuff!!!! Keep it simple and get started. I did not follow this advice myself since our NW was built simply by saving and some real estate. However, I am starting to let in my investable assets into equities again since the new CCPC rules have been set. I will need to decrease cashflow to not trigger the passive income levels.

No book for me thanks since I read everything online nowadays.

Sony
Guest
Sony

great blog topic!
interested in the book
I’m pretty sure I have a Kool aid drinking advisor
time to cut off the tumour
there are always too many similar choices when it comes to picking 3 or 4 ETFs
paralysis by analysis

Loonie Doctor
Guest

Thanks for sharing more of your story Dr. Networth. The more docs that hear different stories like this the better. Like in practice, we should try to use the best evidence available to guide us in investing. It is nice when the evidence shows doing less is better – I think we have stopped doing more interventions than we have started during my career as an intensivist. What seemed to make physiological sense usually turned out to be wrong or not matter when studied more rigorously. Passive and consistent usually wins in investing. However, I do think we need to… Read more »

Don J J Carroll
Guest
Don J J Carroll

Friday, March 16, 2018, 4:27 PM
Just read your Passive Investing Part 2 blog after reading Part I on the Financial Independence Hub blog. Great timing as I am currently looking into ETF’s as I write this request to be added to your book draw; here’s hoping my name will come up on top.

Peter
Guest
Peter

I wish passive investing had existed 40 years ago. Now it is the obvious way to go! However I still have a good percentage of dividend blue chips in my portfolio for the income (along with ETFs, no mutual funds). Just sit back and collect dividends like John Heinzl (G&M). I am in my 70s.

C.HUANG
Guest
C.HUANG

Hi, this is another great summary post! Thanks! I have been trading ETFs for a little more than a year, and after I finally made up my mind to stick with a few index ETFs.
I wish to enter for the book Millionnaire Teacher draw too! Good luck everyone!

Maureen
Guest
Maureen

I’m like your wife and would rather my husband take care of things! However, your blog has convinced me to take a portion of our investment funds and learn how to do it myself. Thanks for the kick in the pants.

Carmen P
Guest
Carmen P

I read A.Hallam’s first book when I became single, again. An eye opener! I used to give my financial guy carte Blanche and wondered why I did not feel I was earning any $€? Since singledom, I have been investing in etfs and a few dividend stocks in my portfolio along with laddered bonds. Love to read book 2. Thanks Carmen P

Invest 44
Guest
Invest 44

Just discovered your website. Looks good. I would like to be in the book draw please

JLO
Guest
JLO

Valuable info that is easily understood.
Hoping that I am the lucky one to win the Millionaire Teacher book so I can share with my family

Guest
Guest
Guest

Thanks for sharing Dr. Being a starter it was very informative and helpful .Interested in the book.

Dr. D
Guest
Dr. D

Just found your blog. I am excited because like you I am a physician working in Ontario. Looking forward to reading through all your articles! and yes please enter me into the draw. Cheers

Nate
Guest
Nate

Subscribed! Interested in reading the book one way or another!

Luiz
Guest
Luiz

I’ve just discovered your blog and it was just in time, as I am struggling between use a Financial Advisor or DIY. I would like to enter the book draw. Many Thanks

Dr. G.
Guest
Dr. G.

Hope this is not a late entry. Would love to have a copy. And thanks for teaching about XIRR. Didn’t know about this, and just did calculations for my and spouses accounts. Thanks!