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Step-by-Step Guide To Not Dying Poor (Canadian Edition)
February 04, 2005

Recently I came to the realization that I knew very little about long term investing. I also realized that to take advantage of the power of compound interest, the sooner you start, the better.

So I set out to find the absolute smartest way to invest my money long term. I perused websites, read a lot of great books, and exchanged a ton of e-mails with Bylo from Bylo.org

After I was convinced that I've set myself up to invest in the smartest way possible, I decided to write a complete step-by-step guide for Canadians who have no clue where to even begin.

Okay Myden, how should I invest my money?

Mutual Index funds.

What are Mutual Index Funds? Are they similar to Mutual Funds?

Very similar. Mutual funds are just a simple way for you, Joe Average, to invest in many, many companies at once. You likely couldn't afford to invest in that many companies on your own.

I know what a Mutual Fund is Myden, but what's an Index Mutual Fund?

It's very similar to a normal Mutual Fund, but it simply tracks an Index of Companies. For instance, you can buy a S&P 500 Index Fund that tracks the S&P 500 Index accordingly.

Ok, but why is that better than a regular Mutual Fund?

Ah, now there's the important question. There are so many reasons that Index Mutual funds are superior!

First of all, in a regular Mutual Fund you have to pay a guy (the fund manager) to constantly watch the fund, make adjustments, etc. These costs are passed on to you, and are known as the MER (Management Expense Ratio). A typical "Managed Fund" will have an MER of 2-4%.

2 to 4% ? Big deal! I thought you were trying to save me some real money here...

You're not thinking long term. Over a course of 10-20 years, that 2-4% can cost you $50,000 to $100,000 of your investment!

Okay, so what's the Management Expense Ratio for an Index Fund?

Usually less than 1% ! This is simply because it takes a lot less work to operate an Index Fund, since it is simply tracking the market.

Alright, but what if I want to find a fund that gives me returns that are much better than your 'index funds' ? Who cares if the cost of paying someone to manage it is a little bit higher, if he's giving me such a great return!

There's the million dollar question, and the biggest kept secret on Wall Street. The simple fact is, there is not a single fund manager in existence that has ever beat the index, over a long period of time. Period.

Read that sentence again. No fund manager can beat the index over a long period of time. History has shown that the stock market as a whole continues to climb, around 10-12% a year. Some fund managers can beat the market for a few years, maybe even 5, but inevitably they will underperform the market.

Remember the 2-4% cost of paying these fund managers ? They have to get returns of 15% or better just to match the index funds!

Okay, so why isn't everyone in the world just investing in index funds?

Human nature. Greed. Wall Street's marketing machine. People like to think they can beat the system. Headlines about stocks falling and rising every day are much more exciting! The simple fact is that if you try to 'time the market' you will lose.

Instead of looking for that needle in the haystack, buy the whole haystack. Gambling has it's place, it's called Vegas. Gambling has no place in your long term investments.

Okay Myden, you've convinced me. But I thought this was a step-by-step guide? So far all you've done is talk.

Step 1: 10% of every pay-cheque should go towards your long term investment. You may think that 10% is impossible, but just take it right off your pay-cheque immediately, and you won't miss it. If you absolutely, positively cannot afford to put away 10% from every pay cheque you are likely living beyond your means.

Step 2: Alright, got that first 10% ? Even if it's as little as $100 you can start growing that money. The first thing you want to do is get a TD e-Funds Account. To do that, first download the application form.

Most of it is pretty straight-forward. When you get to Step 4 (on the application, not this guide) it will ask you how you would like to invest your money. Beside 'Fund Code' put '904' and for the Mutual Fund Name enter in 'TD US RSP Index e-series'

This Index Fund tracks the U.S S&P 500. It has a low MER (0.48), and is an excellent way to start your portfolio.

Step 3: Send in your application.

Step 4: Take 10% of your next pay-cheque and put it into your new TD e-account. Repeat this process every pay cheque.

Okay, sounds good, but is this a very diverse portfolio ? I mean we're just investing in one Index?

Ah, you are a quick learner! After reading many books, and e-mailing Bylo, I've come up with what I feel to be the ultimate long term portfolio. Behold! (Note, this portfolio is geared towards a long term investment, 10+ years. Investments with shorter time frames should set up their portfolios differently).

Fund Type TD Fund Name MER CODE %
Canadian Bonds TD Canadian Bond Index e-series 0.48 909 8%
International Bonds TD Global RSP Bond 2.19 640 4%
Canadian Stocks TD Canadian Index e-series 0.31 900 20%
US Stocks TD US RSP Index e-series 0.48 904 20%
US Stocks TD US Index e-series 0.33 902 15%
International Stocks TD International RSP Index e-series 0.48 905 20%
International Stocks TD Emerging Markets RSP 2.86 674 13%

So, the % in the last column just tells you how much of your money should be invested in each fund. Start off with one fund, and then make your portfolio more diverse as you go along.

Step 5: Every year, shift your money around to keep it at these percentages. This is called 'rebalancing your portfolio'. Impress your dinner guests.

If you have any questions, or disagree with my advice, let me know.

Here are some great websites to check out: