Investing simplified: appendix

There are two accompanying posts that this appendix supports: Part 1: How I got my investment life back on track and Part 2: Why switch teams from WealthBar to WealthSimple.

Mutual Funds vs Exchange-Traded Funds

5 years ago I was gifted a book with a terrible title all about how to develop proper saving habits. Moolala is a phenomenal book that shaped how I think about investing. No matter what stage you’re at, from swimming in credit card debt to understanding the differences between RRSPs or TFSAs to investing in the stock market, it’s a worthwhile read. The world of investing can be daunting, but Bruce Sellery explains it with enough context in a way that’s easy to understand.

Moolala introduced me to a very important concept: Exchange-Traded Funds (ETFs). ETFs and mutual funds (which is what you’re likely investing in if you have RRSPs) have a lot in common:

• They contain hundreds or thousands of stocks and bonds, allowing you to have a diverse portfolio.
• You can invest into them your RRSPs, TFSAs, or general investments.
• They both can be actively managed by a fund manager that has determined what strategy and can rebalances as the market shifts.

There are a couple key difference though:

1. All mutual funds are trying to beat the market by predicting (make a guess) of what the market will do. But if there are winners in the market then that means that there are losers as well. Only ~10% actually come up on top year over year. I don’t know about you but that doesn’t seem like very good odds to me. ETFs on the other hand don’t try to beat the market, they try to match it. The market will experience ups and downs, but investing is a marathon not a sprint. Overall the market goes up over time and so will your investments.
2. ETF’s base fees (Management Expense Ratio or MER) are much lower than your typical mutual fund (some as low as 0.06%, but the average is 0.44% vs 2.20% for mutual funds). This might seem like a small percentage, but this adds up quickly and results in massive gains.

Fund advisors vs robo advisors

Don’t worry, it’s not the Terminator determining where you invest your money. Robo advisors are usually backed by a human.

A fund advisor is the person at your bank who works with you to determine what kind of funds you should invest in. Although it seems like the bank is doing it out of the kindness of their heart, they’re actually taking a pretty hefty fee (usually between 1–2%). Once again, this doesn’t sound like much, but it adds up quickly!

Between the management fee and a mutual fund’s MER, you’ll see anywhere from 3.5–6% of your investments eaten up by fees. Over the last 20 years the average mutual fund has seen gains of 4.67%, which means you could actually losing money despite the fund gaining overall.

That’s where robo advisors come in. The ones I’ve worked with invest exclusively with ETFs. Their fees (management fee + MER) are between 0.35–0.60%. That means that unless the market takes a massive hit (like it did in 2018) your investments will all grow rapidly.

With both WealthBar and WealthSimple you get the added bonus of online planning tools and access to real live human advisors. They can help you identify the funds that match your unique circumstances and needs.