Market Investing

I decided to call this method market investing, although you won’t hear it called by that name by anyone else. What I am referring to will likely be called index investing, or broad market ETF investing, or index mutual fund investing. There maybe subtle differences between these terms depending on who you hear them from but the underlying concept is the same though.

I do not have enough money to buy a share of all the stocks, much less multiple shares of each. I can safely guess that you don’t either (sorry if you are reading this Mr. Buffett). Whenever people talk about the stock market they usually say “the NASDAQ is down 3% today or “the TSX went up 200 points over the past week”. The meaning of this to you is not much if you just have the few stocks that you have managed to buy. The S&P 500 can be flying high while your shares of Scotia Bank are down 5%. It takes someone a lot smarter than you or I to beat the stock market every year (sorry again Mr. Buffett).

Many mutual funds will have you believing that they can beat the market every year. They may even have a graph showing that they did for the last five years. But the longer the time frame the more likely that you are to see that they can’t beat the markets. So you are left with the choice of trying to pick your own stocks to beat the market. But you have a lot of things to do and you can’t study charts and news as much as the mutual fund managers we just decided couldn’t beat the market. So bonds? Not unless you are happy with very mediocre returns, possible losing money over the long term after you consider inflation.

Here is where the key comes in; if you can’t beat ‘em, join ‘em. You can invest in a fund such as VUS which will follow the returns of all the stocks in the United States with the microscopic MER of 0.15%. So your investment results will be identical to the Us market except for the 0.15% you pay in fees. Or to invest in the Canadian stock market you can buy XIC and pay a MER of 0.27%.

Over the course of time the stock market has increased in value. Maybe not in year 1, or even by year 3. But if you wait long enough and have invested in either of the ETFs I mentioned above your investments will go up.

Now in the interest of full disclosure, I do not own either of these funds. This I consider a mistake however. I knew about market investing and had heard from lots of smart sources that it was the best way I could invest my money for a long period of time. I ignored this and bought I an ETF with very little price changes but a solid steady dividend. I also picked up a stock which I think will go up in value a lot and will pay and increase their dividend.

My next purchase is going to be VUS or XIC. I want the prices to go down a bit as both are closer to their 52 week high than their 52 week low. VUS is at it’s high. By waiting for the price to go down I realize I am implying I am trying to time the markets, which is pretty near impossible. But I do not have much capital to invest and simply want to maximize what I have.

So if you are looking for your investments to grow, you should probably just let capitalism do the work for you. Buy an index ETF and forget about it until you have the money to buy more of it. You can buy different funds to mirror different markets, for example THD will folow the Thailand stock market. In the end the market is likely to be the best advisor you can have and it also has the lowest price with very low MERs for all sorts of index funds.


Market Investing — 9 Comments

  1. I have been drawn to XDV and CDZ. I will probably be supplementing them with XIU or XIC. I still have another 6 months (at least) before I make my first purchase. Those three alone should give me some decent diversification. Although I will probably drop another index etf in the mix.

    • All good choices. I would suggest maybe throwing in VUS for the American exposure and I was actually looking and I think I might really like ZDM. It is non North American and also pays a very generous dividend. I want some holdings from outside Canada and the US and that is just one of the funds I have looked at. Good luck, and hopefully the markets are at a better price when you go to buy in 6 months.

      • I know it will probably hurt me in the long run, but I am a huge fan of supporting Canadian Businesses and I guess it followed me into my investing ideas. I do not think I will be heavily investing into the international market much.

  2. Why ETFs? I feel like they’re so trendy right now — it’s like the bandwagon jumping on. I read an article a month or two back in MoneySense that said ETFs weren’t worthwhile if you had less than $50,000… I can’t even remember the reasoning, I just remember I was kind of talked out of it at that point.

    I have little money and I still buy stocks. I usually grab some shares when I’ve accumulated $1000 or more for investing. With Questrade’s low fees of $5 per trade this lets me get $995 of stocks — and if they’re dividend stocks, I’ll earn that back and then some at the next quarterly payment.

    • ETFs allow diversification for those without a lot of money like us. You can buy $995 of one company for that $1000. But there are thousands of companies to invest in, and ETFs let you get a small piece of all of them for a very small fee. Most ETFs you will find will also pay a dividend to cover the trade cost and more.

      I do not know why that article would say that those with small portfolios shouldn’t use ETFs, I think they are the ones who need ETFs the most. I figure I am not smart enough to beat the market so I might as well take its returns.

  3. ETF could benefit less, as they heavily traded based on their day-today (monthly) performance.

    What a coincidence! S&P 500 ended the year of 2011 within 0.01% of where it was at the beginning of the year.
    Wait and see, not long after the presidential election the stock market will collapse and inflation will start raging.

    The bonds (especially mid to long term) will be risky, particularly in light of raging inflation in coming years.

    So it will be an interesting to see this /next year.

    • I agree with you on bonds not being worth it after you consider inflation. They will only cost you purchasing power.

      But just because the market held steady this one year does not mean it will stay that way. And with the US elections, yes it is possible that the markets will take a tumble, but it is also possible that Obama gets reelected and not much changes at all. There have been lots of presidential elections and even so the stock market has historically increased.

      This will be an interesting year or two. Thanks for commenting.

  4. I think you’re misunderstanding the purpose of an ETF. ETF’s are to make previously hard to trade securities easy for the public to buy or sell. For example, before ETFs you had to actually buy options or futures in order to trade commodities.

    • That may be the actual written purpose of an ETF, I do not know for sure. But I also know that the purpose of a phone is to be able to talk with people you are not around at the time. But phones can do a whole lot more than that now.

      ETFs also can do all the things I said. Part of that is making hard to trade securities easier to trade.

      Thanks for stopping by and commenting.

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