Take a drive through downtown Toronto’s financial district some evening and you’ll see tall, well-lit buildings. These are the ivory towers built on financial empires: Manulife Financial, Brookfield Asset Management, CIBC, TD Canada Trust, BMO, CI Financial, and Sun Life, to name but a few.
Ever wonder who pays for those ivory towers? How do they keep the lights on constantly?
Simply put, there is big money to be made in money. These empires deal in money, either by lending it, providing banking services, investing your money, or helping you buy a home. All they ask in return is that you pay a fee. Whether it’s interest on a loan, unpaid credit card balances, fund management, bank accounts, or ATM usage, you pay a fee for their service. It doesn’t seem like much, but look at the record profits these giants are making – yes, those fees definitely add up!
The Problem with Fees
I’ve gotten a very sour taste in my mouth over fees during my lifetime. High-fee mutual funds that have mediocre performance really stick in my craw. Same goes for monthly bank fees that have risen over the years. Occasionally, I’m forced to pay an ATM fee because I couldn’t find a machine that dealt with my bank. I could go on, but I’d just get more upset.
Some fees are a reality of life since most people simply can’t save up enough to buy their house with cash, so they need a mortgage. Other fees, such as credit card debt, are so unnecessary and border on the practice of legalized loan sharking.
Investment FeesThe Secret to Investment Success
The key to investment success is keeping the fees low, diversification, accepting that you can’t predict the future, and buying and holding for the long term. I use exchange-traded funds (ETFs) and passive investing, and it’s the dirty little secret no financial advisor wants you to know about.
In this internet society, it’s never been easier to open your own investment account, buy low-fee well-diversified funds, and manage your own investments. I’m sick and tired of being told that investing is too complicated for the average person and you need to pay a professional a fee to manage your financial future.
Our widespread acceptance of this misinformation provides the secure foundation for every one of those ivory towers.
Why ETFs and Passive Investing?
ETFs are a type of investment fund that is traded on stock exchanges, much like stocks. They hold assets such as stocks, commodities, or bonds and generally operate with an arbitrage mechanism designed to keep trading close to its net asset value.
ETFs typically have lower fees than mutual funds because they are passively managed. This means they track a specific index rather than having a manager who makes decisions about buying and selling.
Passive investing, on the other hand, involves buying a broad market index and holding it over the long term. The idea is to mimic the market’s performance rather than trying to beat it. This strategy is based on the belief that, over the long run, markets tend to rise, and attempting to outsmart the market often results in higher costs and lower returns.
How to Get Started with ETFs and Passive Investing
Getting started with ETFs and passive investing is simpler than you might think. Here’s a step-by-step guide to help you take control of your financial future:
- Educate Yourself: Take some time to learn about investing, ETFs, and passive strategies. There are plenty of free resources online, including blogs like this Manage Your Money, podcasts, and videos.
- Choose a Brokerage: Find an online brokerage that offers low fees and a wide range of investment options. Look for platforms that are user-friendly and provide educational resources.
- Open an Account: Follow the steps to open an investment account. This typically involves providing some personal information and linking a bank account.
- Fund Your Account: Transfer money from your bank account to your investment account. Start with an amount you’re comfortable with, even if it’s just a small sum.
- Select Your ETFs: Choose a few ETFs that offer broad market exposure. For example, you might pick an ETF that tracks the S&P 500, one that tracks international markets, and another that includes bonds.
- Make Your First Purchase: Use the funds in your account to buy shares of the ETFs you’ve selected. This process is similar to buying stocks.
- Monitor and Rebalance: Periodically check your investments to ensure they are still aligned with your goals. Rebalancing involves adjusting your holdings to maintain your desired asset allocation.
Staying the Course
Once you’ve set up your investments, the hardest part is often staying the course. Here are a few tips to help you stay focused:
- Ignore Market Noise: The stock market can be volatile, and it’s easy to get spooked by short-term fluctuations. Remember, you’re in it for the long haul.
- Stay Informed but Don’t Overreact: Keep yourself informed about the market and economic conditions, but avoid making knee-jerk reactions based on the latest news.
- Automate Your Investments: Set up automatic contributions to your investment account. This helps you stay disciplined and take advantage of dollar-cost averaging.
- Review Your Goals Regularly: Periodically review your financial goals and make sure your investment strategy is still aligned with them.
Common Misconceptions About Investing
There are several misconceptions about investing that can hold people back. Let’s debunk a few of them:
- You Need a Lot of Money to Start: This is not true. You can start investing with small amounts of money. The key is to start early and contribute regularly.
- Investing is Too Complicated: While there is a learning curve, investing is not as complicated as it’s often made out to be. With the right resources and a bit of effort, anyone can learn the basics.
- You Need a Professional to Manage Your Money: As we’ve discussed, managing your own investments is entirely possible, and it can save you a lot in fees.
- Investing is Risky: All investments come with some level of risk, but there are ways to manage and mitigate it. Diversification and a long-term perspective are key strategies for reducing risk.
Final Thoughts
Investing doesn’t have to be a mysterious or intimidating process. By educating yourself, choosing low-cost investment options, and sticking to a long-term plan, you can take control of your financial future. Don’t let the fear of the unknown or the allure of high-fee “expert” advice hold you back.
Remember, the well-lit towers of the financial giants are built on the fees and charges they collect from everyday people like us. By taking charge of your investments and minimizing fees, you can keep more of your money working for you and achieve your financial goals.
Start small, stay informed, and watch your investments grow. You have the power to build your own financial empire, one step at a time.
In my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.
Disclaimer for ManageYourMoney.ca
The information provided on ManageYourMoney.ca is intended for educational and informational purposes only. It should not be taken as financial advice. The opinions shared are those of the authors and are meant to encourage sensible financial habits and decision-making. We recommend that you do your own research or consult a certified financial advisor before making any financial or investment decisions. All investments come with risks, and there is no guarantee of success. Past performance is not a reliable indicator of future results. Always consider your personal financial situation and risk tolerance before pursuing any investment opportunities.
As always, we are not a qualified financial advisors. We just relate financial management to our own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of ours came from expensive experiences.
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