ETFs for the Common Investor


So the nice thing about being a staff writer for a great site like Young and Thrifty is that when you produce a neat little project, the powers that be allow you to get exposure (or as the kids say these days, “pimp it”) on their site.  I really appreciate the review that Y and T did for the book, and I am grateful for the chance to go explain my feelings on ETF investing a little more.

[Editor's Note: You're welcome! Thank you for being a staff writer.  Don't know where this blog would have been without your help!!]

For Wall Street To Get Rich, Someone Must Lose

In short, the main reason you should invest in ETFs is because the vast majority of people that believe they can beat the market, simply don’t.  Let me explain who you are competing with when you try to pick stocks in the stock market.  The guys that run billions of dollars’ worth of hedge funds, they have entire teams of geniuses that have went to noted financial schools for years, then spent years more building a career that meant spending 70-80 hours a week behind a desk looking at financial statements.  On top of that, they literally pay government insiders for semi-confidential information, in addition to the information networks they have that provide them with valuable info that is not available to most people.  As if those advantages were not enough, most “hedgies” or large investment firms such as Goldman Sachs also have former NASA mathematicians or someone similar to do their statistical analysis.  When you combine math geniuses with supercomputers that can carry out investing algorithms (see: high frequency trading and quants) you get a money making machine.  So, if you are smart enough to beat that set up, why are you reading this blog and why are you only worried about investing your own money?

The bottom line is that the stock market is heavily slanted.  The big boys like Goldman Sachs give maximum donations to both political parties in the USA every year, I highly doubt that this will change.  This is on top of the fact that we as humans are genetically predisposed to being terrible market-timers (see my eBook for proof).  The sad thing is that many people have realized that the stock market is slanted and have come to the false conclusion that they should just stay out of it entirely.  The fact still remains that equities will always give the highest overall return on investment of any asset class; therefore, if you bypass investing in the stock market entirely, you are missing out on mega growth of your nest egg.  This is why ETFs are so great for the average investor.  You don’t have to compete with the math geniuses or business gurus, you don’t even have to worry about which fund manager might have the best insider trading information.  All you have to worry about is setting your asset allocation (we cover this in the book) and you are set to go.

Maybe I Am The Chosen One?

In order to back up my theories, my favourite study in the book is an extensive Dalbar study that was done from 1990-2010.  The study concluded that while the S&P 500 returned 9.1% on average over those years (a little under the historical average, but still pretty good) the average American investor only returned 3.8%!  The main reasons being that their built-in human instincts were terrible for allocating capital (investing) and the fees and commissions killed their returns over time.  It just doesn’t make sense to me to believe that you can beat the market over the long-term unless you are a really smart person, making very focused bets.  Go ahead and see how many successful money managers have looked like geniuses for a little while, and then crashed and burned once their portfolio got too big.  I will grant mutual fund devotees that there are funds and managers out there that can beat the market, but I am skeptical as to if they can be found consistently, and how many of these types the average investor even has access to.  ETFs just make so much more sense on a consistent basis.  If the investors in the aforementioned study had merely purchased the Vanguard ETF VOO over and over again, they would have increased their average returns almost 2.5 times (just check out what that does when compounded yearly).

If you aren’t yet convinced that ETFs are probably for you, then check out my eBook.  I included the table of contents below for a sneak peak.  I’m looking forward to reading your comments and/or suggestions!

Chapter 1: How Can I Make You $248,484.92, While You Chill On Your Couch

Chapter 2: My Story

Chapter 3: What the Heck is an ETF?

Chapter 4: Why Most People Can’t Beat The Average and Why You Shouldn’t Try

Chapter 5: Why ETFs Kick Mutual Funds’ Butt!

Chapter 6: What ETFs Belong In My (or your) Portfolio

Chapter 7: Exotic ETFs

Chapter 8: Potential Drawbacks of ETF Investing and How To Minimize Them

Chapter 9: Getting Started With ETFs In 99 Minutes or Less

Interested for more?  Click here to download the free ebook!

15 Comments

  1. crystal on April 11, 2012 at 1:12 pm

    I have been wanting to get into ETF for awhile now. i checked with my previous pension advisor and they don’t sell them and I checked with my local bank who i currently have investments with and they don’t sell them. I think this book would greatly help me get started and can’t wait to download it.



  2. My University Money on April 11, 2012 at 9:16 pm

    It doesn’t surprise me that your pension adviser or bank does not sell ETFs – because they wouldn’t make any money off of them! I actually show you the exact brokerage and everything I recommend Crystal. If you have any questions, just ask!



  3. Frugal Fries on April 12, 2012 at 4:28 am

    You had me sold at the first chapter 😉 Currently a mutual fund girl, but I’ve been looking into ETFs because of the lower costs.



  4. My University Money on April 12, 2012 at 6:00 am

    Repeat after me Frugal “My name is _________ and I am a mutual fund investor”

    “Hi _______”

    “Don’t worry __________ no judgement here, we just want to help people who are addicted to high MER fees.”



  5. The Dividend Ninja on April 12, 2012 at 10:01 am

    Y&T I woke up this morning in a cold sweat, after I had this strange dream last night.

    I was surfing the web for Canadian financial sites, and everywhere I looked I saw this ETF Guide written by MUM. Then I strated looking on seeking-alpha and other US dividend sites, and saw the same ETF guide. Then when I loaded my site, you can imagine my shock when I saw MUM had written an ETF post on the Ninja, and it was my third most popular post! OMG.

    Whew!, I logged into my brokerage account this morning, and all my dividend stocks were still there generating dividend income. Nice! 😉

    (But if I was going to invest all of my portfolio in ETFs this is an excellent resource! It’s Ninja recommended. Don’t tell anyone I have a couple of Bond ETFs… )

    Cheers
    The Dividend Ninja



  6. My University Money on April 12, 2012 at 4:40 pm

    While author’s sleep… I live only to spread the ETF Gospel. With great power comes great responsibility. 😉

    I even heard that crazy guy managed to infiltrate Rob Carrick’s reader with his ETF rant…



  7. young on April 12, 2012 at 8:18 pm

    @MUM- Woot! You got on Rob Carrick’s reader! Can’t wait for your real book to come out. Maybe you and Andrew Hallem can tag team and write The Millionaire TeacherS!



  8. young on April 12, 2012 at 8:21 pm

    @TDN- Haha MUM is taking the Personal Finance world by storm! I’m going to be sharing my current TFSA portfolio at the end of the month and I think MUM and other ETF fans will be proud of me.



  9. young on April 12, 2012 at 8:29 pm

    @MUM- maybe you should start a “mutual fund investor anonymous” club! MFIA- has a good ring to it. I think the momentum is picking up and people are seeing what options are out there. MoneySense wrote that the largest growth this last year is the ETF sector!



  10. young on April 12, 2012 at 8:30 pm

    @FF- DO IT! You’ll be so happy you did. You’ll be accountable for yourself and not have to surrender your money to a mutual fund advisor.



  11. young on April 12, 2012 at 8:31 pm

    @crystal- It’s very very easy. Just open up a Questrade Account (or whatever you want to use!) and then buy the shares of the ETFs you want. Then rebalance annually or regularly and et voila you’re an official ETF investor!



  12. My University Money on April 12, 2012 at 9:07 pm

    That would be awesome… mainly because I would have to be a millionaire to write the book. Seriously though, Hallam is the man!



  13. Roshawn @ Watson Inc on April 14, 2012 at 5:41 pm

    ETFs are a great way to diversify your portfolio. I do like their liquidity, even if you are not a trader. There are always SOME pitfalls to watch out for. Overall, they definitely have a lot of advantages.

    “In short, the main reason you should invest in ETFs is because the vast majority of people that believe they can beat the market, simply don



  14. young on April 16, 2012 at 7:54 pm

    @Roshawn- It’s hard to come to the resignation that we can’t beat the market. I think that’s because there’s a little bit of a gambler personality in all of us lol.



  15. young on April 16, 2012 at 8:05 pm

    @MUM- Hey with your teacher’s pension it’s completely doable!



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