Why Most People Lose Money In The Stock Market

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Photo by bfishadow @ Flickr
Photo by bfishadow @ Flickr

The Stock Market.

We hear about it nearly every day. The Dow dropped 110 points! The S&P 500 shot up 20 points! People seem to be getting rich off the stock market, but when I try to invest all that happens is my stock picks go into the crapper! How is that possible? What is going on?

Well, as someone who managed to retire in his 30’s because of the stock market, I have some insight into this. It’s actually quite simple, and it’s something you already suspected, which I’m about to blow the lid off.

You ready for this?

The Stock Market is rigged.

Sorry, let me qualify that.

In the short term, the Stock Market is rigged.

That is an important distinction, and I’ll get to why later, but first let me explain how most people deal with the stock market and why it doesn’t work.

Most people when they think about “stock picking” they are combing through a newspaper or their eTrade account and hunting for “winners.” And this process of hunting for winners typically involves reading CNN Money, picking up hot stock tips from your idiot co-worker, and outright guessing.

I read an article once that men like boobs. It's BULLETPROOF. Photo by Ildar Sagdejev @ Wikipedia
I read an article once that men like boobs. It’s BULLETPROOF. Photo by Ildar Sagdejev @ Wikipedia

I myself gave this a shot back in the day, but with fake money in online stock picking contests. And out of 10 stocks, maybe one would shoot up but on average, my pretend “portfolio” would just keep grinding lower and lower.

Here’s why this doesn’t work.

Legendary investor Benjamin Graham described the stock market like so:

In the short run, the market is a voting machine, but in the long run, it is a weighing machine.

He said this because the market is basically millions of people pushing individual stock prices up and down with their buys and sells, like up-votes and down-votes in a Reddit thread. When investors believe a stock is actually worth more than its current listing price, they buy. When they believe it’s worth less, they sell. The idea is that this will eventually cause a stock’s price to settle to somewhere around it’s “real” value.

The problem is, it didn’t take long for Wall Street to realize that unsophisticated retail investors (i.e. us) are easily manipulated, and they soon figured out ways to exploit that. They’d find ways of getting access to news stories before they go public, or worse, completely fabricate stories themselves by leaking fake crap to the press, then get into positions that make them money as the retail investors (us) flood in, then use options or short selling to make money as the stock plummets when everyone discovers the stories were all hot air. They rig the market by manufacturing volatility, then profiting off that volatility.

I know this happens because I saw it first-hand.

Right around the time I left my job, my company was acquired by a major semiconductor giant. And in the months leading up to the buyout, rumours were flying around the press like crazy. Every day, a new piece on Motley Fool or Forbes would report some “inside source” claiming that talks had broken down, then resumed again, that our CEO was demanding some exorbitant amount, that their CEO was overhead saying he wanted to scuttle the deal.

And after the acquisition happened and the dust settled, we learned that all that drama was completely made up. Someone was leaking news to the press about all this boardroom cloak-and-dagger crap to make the stock price swing up and down. And it totally worked. Our stock price, which historically had just sat in one place for the last 5 years, was swinging up and down 10% per day by panicky traders who were trying to outguess each other. Whoever leaked that news made a killing, I’m sure.

So if the stock market is a minefield of danger, then how the Heck are we supposed to invest safely?

For me, success in investing only came when I realized one simple truth:

I don’t know how to beat the market

In fact, there’s plenty of evidence out there that almost NOBODY can beat the market. Not consistently, anyway. Oh sure, people can get lucky for a year or two, but the people who can do it consistently are so rare that they’re practically unicorns (I’m talking less than 1% of fund managers). So knowing that, it would be incredibly arrogant of me, an unsophisticated retail investor, to think that I was somehow one of those unicorns.

So knowing that I don’t know how to pick winning stocks, what do I do instead? Simple. I just buy ALL stocks.

Index Investing is the strategy of not even trying to beat the market, but to simply match market returns by buying the entire market. It’s a strategy that anyone can do, and is endorsed by none other than Warren Buffett himself, who famously advised his heirs to put his estate into index funds after he was gone.

Let’s break down why we should all follow Warren’s advice.

Reason #1: It Works

While some businesses rise and some businesses fall, all businesses in the country, as a whole, make money. If you look out your window, there are clearly more houses, more roads, more business and more buildings now than there were 25 years ago. That’s because while individual humans may get rich or go broke, humanity as a whole marches forward.

This, however, does NOT mean that if you just plunk money into the S & P 500 it will go straight up. As we’ve seen, the index does have negative years. However, when held over sufficiently long periods of time (i.e. 15 years or longer), it is impossible to lose money. In fact, the median annualized performance of the S & P 500 over 15 years is 12.2%! I’ll take that kind of performance any day.

Reason #2: It’s Simple

The finance world is rife with people selling complicated schemes, using options or collateralized debt or whatever in an effort to confuse you and rip you off. But making money in the stock market is not complicated. In fact, the more complicated the product, the more likely it’s terrible. But Index Investing is simply based on the fact that businesses make money as a whole, and will continue to make money as a whole. That’s a concept that an 8 year old can understand, and that’s why it works.

Reason #3: It’s Cheap

Active trading is expensive. Every transaction costs money, you have to pay the guy managing it, you have to pay for fancy ads, and office space. Besides, all that cocaine and hookers Wall Street goes through? That shit ain’t free.

As depicted in this documentary.
As depicted in this documentary.

Because there’s no fund manager who has to pick stocks behind the scenes, Index Funds and Index ETFs have ridiculously low fees. The average Management Expense Ratio, or MER, of an actively-traded equity mutual fund is north of 2%. An Index ETF that tracks the S & P 500? 0.1%

Reason #4: It’s Impossible To Go Bust

The number one fear of everyone that invests is losing all their money. And if you pick individual stocks, it is absolutely possible to lose your shirt if all your picks go bankrupt. However, because Index Investing buys the entire market, the only way for it go to zero is if ALL businesses cease to exist. And if that happens, the aliens have already invaded and blown us all to smithereens, so who cares what your portfolio looks like?

As depicted in THIS documentary. By Source, Fair use of copyrighted material in the context of Independence Day (1996 film)' href="//en.wikipedia.org/wiki/File:Independence_day_movieposter.jpg">Fair use, https://en.wikipedia.org/w/index.php?curid=1362689
As depicted in THIS documentary.

Reason #5: The Banks Don’t Want You To Do This

Which brings us to the final, and most convincing reason to use Index Investing.

Here’s an exercise: Walk into any bank, ask to speak to an Investment “Advisor” and tell them you want to put all your money in low-cost Index funds. Now watch with amusement as they try every salesman-y trick in the book to try to talk you out of it.

Why are they doing this? Because the banks don’t make any money from Index Funds. They can’t churn your accounts, they can’t lock your investment in for arbitrary amounts of time, they can’t even justify hiring an expensive money guy to run it! Instead, they want to put you into shitty actively managed mutual funds that charge over 2% for lagging the market, and then collect their fat commissions for doing a crappy job.

In fact, I’ve heard some Wall Street people grumble about “those damn Indexers.” Why? Because those analysts and traders spend all day trying to price and re-price individual stocks, which causes the index to rise and fall. And over time, if they do their job correctly, the index will rise because the index is getting re-priced to reflect the fact that businesses make money and are therefore worth more.

So from their perspective, they see Index Investors as stealing their hard work, benefiting from all the time and effort that goes into analyzing every company on the stock market, while not paying them a single cent.

So basically, every time you buy an Index Fund, you are stealing from Wall Street.

And if that’s not a good reason to invest using Index Funds, then I don’t know what is.

Read the next article in this series: How to Build a Portfolio

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83 thoughts on “Why Most People Lose Money In The Stock Market”

  1. Another fantastic post – and love the wiki link to the S&P’s historical market stats

    We’re 32, earning about 110k after tax but only saving 35-40% of it yearly (somewhat accidentally). We’re where you guys were 10 years ago – spending a bit too much on vacations and dinning, but also making some smarter choices too… like renting. We’re not particularly careful with our money but still manage to save what we do – meanwhile our homeowner friends are deep in their credit lines and with palpable levels of financial stress.

    Your blog has inspired us to get serious, run numbers and come to the realization that semi-retirement for both of us (supported by just a bit of gig economy work each year) could be as close as 6-7 years.

    1. *applause* YES! What we’re trying to get across in this blog is that the secret to becoming an Millionaire is not hitting a home run and building the next Facebook, it’s NOT shooting yourself in the foot with housing. You guys are well on your way. Great job!

      1. Full disclosure, fully support this mind frame, and I applause your willingness to share BUT isn’t a little unfair to preach “stay away from housing”?

        I read your “how we got here” series so far, and its friggen awesome BUT let’s say you bought that house in 2008 for 500K. Wouldn’t it be worth around 1M+ in today’s market? It’s true your total monthly housing costs go way up, but 1/2 that mortgage is principle pay down. So, now in 2016 you got 500K equity (at least) + ~60k paydown (assuming 5% interest) + savings.

        Even you admit that there was some splurging going on in the early days on food and entertainment, so I imagine smart peeps like you guys would have just “eaten” into that discretionary fund to make up the extra housing costs. Not trying to intentionally be devil’s advocate here but I’ve read blogs/books, and personally met people who achieved the same goals by the same age buying real estate and owning vs renting.

  2. So glad to find out that I’m not the lone voice in the wilderness! This blog is amazing.
    I’m nowhere near ‘retirement’ yet but with the current economic conditions in Calgary I’m also nowhere near panicking like so many others. In fact I’m currently researching where I’d like to make a temporary move to (Spain?) if I get laid off. I certainly won’t be sitting around worrying about how to pay my insane condo fees!

    Keep up the great work!

    1. Thanks for that! And glad to hear you’re not panicking over what’s going on with oil. I see so many people from Calgary losing everything oil crashed despite having made 2x-3x my salary. Always have this deer in the headlights look of “Where did it all go?” Good for you for not getting caught up in that!

  3. Great post. I’m a Gen-X er and realized 15 years ago never to trust bank advisors. I was sold mutual funds that were bank end loaded funds with high MERs. How naive of me back then. I left them after saying how I was going to switch to index funds (not popular then) and never looked back. Since then I’ve been very successful using mainly dividend, value / high yield and some indexing.

    Keep up the good work!

  4. Why do you guys bother with Garth’s shop running your portfolio? What’s wrong with DIY? At this stage, you’re less sensitive to share price fluctuation, so there should be less need to fiddle with the holdings.

    1. We’ll explain this more in depth with a future post, but the short answer is that the trick to accumulating money is not to hit a home run, but to avoid shooting yourself in the foot with an expensive mistake. He’s useful as a second opinion on any money-related decisions we make, and he has in fact stopped us from doing things that, in hindsight, would have killed our portfolio.

      1. I agree. I used to manage my money when I was employed and living in the US (NYC). When I got “retired” by a big 5 financial institution, I took the money and ran to Garth. I can now plan my vacations and winter getaways without worrying about how I am going to finance them. Plus, I am not a tax guru; Turner Investments advice on tax-wise investing lets me sleep at night. I am a boomer, but have been weaned from ever owning RE again.

  5. You guys are smart to use Garth,he has saved me from shooting myself in the foot a few times too.Your own worst enemy in investing is looking back at you in the mirror!
    I’m a Gen X tradesman and saving 50% of my take home pay(automated to Garth every payday),live below my means,obviously and rent.
    The peace of mind knowing there’s a nest egg that’s well managed and growing like crazy is awesome!
    Keep up the good work,very inspiring!

    1. Fantastic job saving 50% of your take home pay and renting! Very impressive! We have friends who make over $200K combined and can’t save even 10%. You are WAY ahead of most people.

  6. Another excellent and entertaining post. Even when one’s being logical, it’s not always easy to stay the course during market fluctuations. I have index ETFs, but very often get the urge to play with the allocations or do some ‘entertainment investing’ like stock picking. So I can see the worth of having a good advisor when your portfolio reach a certain size.

  7. In fact, there’s plenty of evidence out there that almost NOBODY can beat the market. Not consistently, anyway

    As you quite well articulated for most people a balanced portfolio of low cost ETFs make sense and it’s something I encourage people to do as well but the idea that the only reason to do this is that you can’t consistently beat the market is incorrect. The reason the average joe loses money is exactly as you said. Trend following. You can beat the market long term and many investors have done this but It takes discipline effort and a consistent approach to do this.

    1. “You can beat the market long term and many investors have done this but It takes discipline effort and a consistent approach to do this.”

      Which approach? I have yet to hear about one that consistently beats the market.

      1. Besides, once you hear about this mythical approach, the extra returns disappear.

        Value-oriented and small-cap can help outperform, but going beyond that is tough.

      2. Just a blanket “Mad respect” FIREcracker… just a couple things: IMHO, nobody needs a portfolio manager. I assume most of us on here and other FIRE sights are educating ourselves enough to know that you can pretty much just stick your $ in a low-cost Vanguard Index (ETF, Roth, 401k etc) fund and fugettaboutit. Second thing, I recommend to everyone on here to read Daniel Solin’s books. He’s a master. He absolutely destroys Wall st. and all of their crappy “fund managers”. Peace.

  8. Can you specify which mistakes would have killed your portfolio that Garth prevented? I.E. like buying a home with too big a mortgage or buying individual stocks which have higher risk?

    1. short answer: both. Not buying the house and dividend investing. Because we were looking for dividend income, we were considering individual common stocks and chasing after yield. This would’ve caused us to be heavily weighted in finances and oil, and we would’ve been screwed when oil crashed recently.

      1. Isn’t that mainly just an argument for diversification? Possibly over time so that you can target things that pay well today?

        Diversification mitigates the risks that you’re describing, but diversification has diminishing returns and apparently past a certain point has little value.

  9. I’m a boomer, retired at 60…with a healthy retirement nestegg. I have investments in ETF’s which are barely holding their own, given the economy. I have probably half of my nestegg sitting in a low paying interest bearing savings account. I do not use any of this money, but live off my benefits. I am terrified of losing my principle if I invest it, so have chosen to take the safe road and let it sit in the bank account. I read that you have invested in index funds, understand that you feel safe. I would like to know what you have invested in to have that security and safety.
    I have a fee based advisor, who under my guidance has invested my ETF’s in the U.S.
    I would consider following your advice, speaking to my advisor and taking money out of the crappy savings account to invest. I too would be happy with a 12% added income to my funds.
    Thanking you in advance for your anticipated reply.

    1. Yes, I would agree that since your living expenses are covered by your benefits, keeping so much in cash seems too conservative.

      However, in order to use Index ETFs properly, you need to combine it with other assets that tend not to move up and down with the stock market in order to construct a portfolio that goes up over time but also doesn’t swing all over the map and give you heart attacks. This is called re-balancing, and I’ll be writing about this in an upcoming post.

      Also, keep in mind that if you want to make any changes to your investments, I am not a licensed financial planner or anything, so I can’t give specific advice. All I can say is what worked for me. Work with your advisor before doing anything.

      1. Have you written about this? could you post a link please?
        I am in a similar position to CPM, though I have some shares in mining and banks. Also some cash in a low bearing (2.60%) interest account, and a homeowner. I would love to know how to increase my income without waiting years as at my age who knows DOD?

  10. Were “I” Canadian, I also would look into using Garth T. As is, I am a ‘retired’ yank, who has YET to find an investment adviser who can DO the job as good as, and as inexpensively as I can buy, and rebalance the inexpensive INDEX FUNDS in my portfolio. I have been watching some of the robo-advisers my opinion not yet formed, but interesting.

    Not that I didn’t try to find a decent investment adviser, who in reality only try to talk us out of doing stupid emotional reactionary things which ultimately damage our own best interests.

    Once an investor understands not to react to his emotional state (the tend to sell low, buy high), he might also successfully dabble with a few individual stocks that get kicked in the teeth every so often for no good reason, and try to make a few extra bucks of ‘play money’ if one enjoys that type of thing. I do, so I like to piddle with stocks, while the bulk of my investments are in those broad based indexes, even some sector fund ETF’s A 60/40 equity/ fixed balance is the goal.

    It is not a ‘game’, or is it? Maybe it really is a game, who knows. I think of my stocks as more ‘play money’ with a dividend bent than anything else. So far it works. It is not for everybody, but it is my favorite flavor of investment soup.

    Enjoy your blog!!

    1. I loathe to think of any investing activity as a “game.” It’s too important, and it’s too easy to get in a mindset of “ooh, I’m gonna do something clever and win big time,” which is of course when bad things happen.

      That being said, as long as your core holdings are indexed and you have a tiny amount (<5%) that you're playing around with, you can't blow yourself up too badly.

  11. “While some businesses rise and some businesses fall, all businesses in the country, as a whole, make money. If you look out your window, there are clearly more houses, more roads, more business and more buildings now than there were 25 years ago. That’s because while individual humans may get rich or go broke, humanity as a whole marches forward.

    This, however, does NOT mean that if you just plunk money into the S & P 500 it will go straight up. As we’ve seen, the index does have negative years. However, when held over sufficiently long periods of time (i.e. 15 years or longer), it is impossible to lose money. In fact, the median annualized performance of the S & P 500 over 15 years is 12.2%! I’ll take that kind of performance any day.”

    I’m sorry, but a Wikipedia link to the S&P 500 that only tracks back to 1970 is not a very convincing argument for the long-term profitability of markets. Consider a data set that includes the 1920’s leading into the 1930’s and I’m sure you’ll see a different story – for example: http://awealthofcommonsense.com/2015/04/are-stock-market-returns-since-the-1980s-an-aberration/

    While I don’t agree with the author’s overall view (“As long as people continue to innovate and set out to improve their lives I see no reason why stocks can’t give investors a decent return above the rate of inflation in the future.
    Betting against human ingenuity has always been a bad idea.”), I do appreciate his calculations that the real rate of return on the S&P from 1927-2014, which was 6.76% (though I suspect this would be a much lower value if another Great Depression transpires in the next few years).

    Something I think people need to take into consideration is that during that period of time the world increased its access to cheap & plentiful energy in the form of oil (which is becoming something of the past), as well as increasing the amount of debt around the world exponentially (which had the effect of driving up prices on assets and commodities almost everywhere). Once the cheap oil and easy debt is gone (and I’m sorry, but I don’t see any realistic cheap energy sources on the horizon – alternative energy solutions like solar panels and wind turbines are, in fact, made with fossil fuels), the prices of houses, gold bars, BMW’s, children’s toys, dining wear, cheap crap out of China, likely many stocks and a whole bunch of other creature comforts we take for granted will no longer be sustainable. Whatever little money people have remaining will go to the necessities – food, health and energy to keep the lights on (and if you’re in Canada, the house warm from November to April).

    As engineers, if you think some of the predicaments I’m presenting here have simple solutions, I’m very curious to hear them. My southern-Ontario educated engineering friends can’t seem to provide me any satisfactory answers, yet continue to argue that the “doom & gloom” outcomes I’ve raised will not come to pass.


  12. Great information! I think it’s great that both of you are taking the time to share some of what got you to retirement at 31 (congrats, btw).

    Props for quoting Ben Graham too – his books have had a bigger impact on my own financial awareness than anything else I’ve read. I imagine you’ve studied his works as well. You should post your reading list for others to see.

    If possible, you should write a follow up to this post with some more entry-level information on index investing; its such a great strategy and has the added benefit of being completely accessible to investors that are inexperienced and have limited initial capital. You mentioned purchasing an ETF that tracks the S&P 500. Sage advice. But what millennials (and everyone else, for that matter) really needs to hear is that a very well diversified portfolio can be achieved with a small basket of ETFs that track several different indexes to get investment exposure both in fixed income and equity holdings across multiple economic regions. Such a portfolio requires minimal maintenance apart from semi-frequent rebalancing and is incredibly inexpensive to maintain. Win.

    I think I was pushing 28 before I even heard the term “ETF”. Dark times. You can help others avoid being that clueless so deep into their working years.

    Anyway, thanks again. Sub’d.

    1. “If possible, you should write a follow up to this post with some more entry-level information on index investing”

      Good idea. We’ll queue up some articles and maybe a video.

  13. I read your news article and the ones on investing, just wondering how you managed to save $500K within 4 years in order to invest?

    My husband and I currently make upwards of $200K and budget quite well saving 20-30%, at that rate it takes more than 10 years to save up $500K. Granted, we do have a house w/mortgage but still are able to save.

    What do you guys do differently?
    What kind of budgeting do you use?

  14. @BOOM! -or- Retired Boomer-WI — You might be interested in the investment strategy of the late Harry Browne, who suggested dividing one’s capital pool into two portfolios: a permanent one and a variable one. If you google either of these terms, you will find sites/articles about this. I found the advice to be quite advantageous.

  15. What financial institution would you recommend? You said that tracking ETFs have MERs of 0.1%. My institution’s MER is 0.33%

    1. That sounds like the TD e-series mutual fund. I used those as well until my portfolio got large enough that switching to low-cost ETFs made sense. I used iShares ETFs, so maybe start your research with them? The BMO ETFs like ZCN are pretty good too.

  16. ive already called and asked around to speak to an investment advisor, and they said exactly what you said they would do. So is there anywhere else I could that could “help” me with my investments , low cost fee obvo.

    1. Ugh, bank people are crooks.
      If you have assets above >$150k, give the Bearded One a call (http://www.greaterfool.ca/contact-garth/). He knows what he’s talking about and won’t try to screw you.
      If not, you’ll have to educate yourself (read through our Investing articles as a start) to the point where you’ll be able to recognize good investment ideas and the scams the banks peddle.

  17. I’m curious how you can make $40,000 a year off of dividends with a million dollar portfolio using index funds.

    If you take the recommended Canadian Couch Potato balanced portfolio with Vanguard ETF’s of 40% VAB, 20% VCN and 40% VXC and invest a million dollars into it right now you will get 1.88% yield from VXC currently, 2.72% from VAB and 2.33% from VCN. A total of $23,060 for a year in dividends and interest.

    I could see how it would be possible to make $40,000 with dividend stocks that had yields of 4-5% but not sure how you can do it with ETF’s or index funds with their low yields. Are you selling part of your funds to live off of?

    Another thing I was wondering was if you are like me you have your non-Canadian stocks and your bonds in a non-taxable account. How are you living off of your dividends in that situation? Do you regularly take money out of your RRSP and TFSA to live off of?

    1. Whoa. That is a LOT Of questions 🙂

      Okay, so the short answer is: ever since retiring, we pivoted our holdings to higher yielding assets like preferred shares, REITS, corporate bonds, and high-yield bonds. Our equities have been pivoted slightly towards dividend aristocrat ETFs, but at our core, we are still indexing. This has gotten our total yield up to about 3.5%. The rest of the 0.5% does require harvesting a small amount of capital gains, but we’ve mitigated having to sell into a down market based on the strategies we’ve outlined in our Sequence of Returns Risk article.

      And yes, our non-canadian stocks are in registered accounts. And yes we are gradually drawing down our RRSP and TFSA. Because our post-retirement income is essentially zero, we pay no tax on those withdrawals.

      1. Making more sense to me now thank you. And thanks so much for making this web site. The internet is the only place I can find like-minded people when it comes to investing it seems. Nice to see so many different ideas and plans to consider.

        If I had a blog it would be about how to get rich by spending 10 years in the oil sands with your girlfriend and save 70% of your income while living for free in camp working 10 hours a day 3 weeks in 1 week out at a time and invest it in the stock market just after the 2008 crash. We also have traveled quite a bit. Italy, Hawaii, China, Vietnam, Costa Rica, USA. That was mostly because we lived in northern Alberta and really needed to go somewhere warm occasionally. Now we are back in beautiful sunny BC and don’t really feel the need to travel as much.

        I started out with the Streetwise Funds at ING Direct at first and then moved into some dividend stocks and REITs and recently with the oil crash some of my oil holdings went down so much that I realized I need to be more of an indexer and less of a stock picker. One or two bad picks can really drag your portfolio down. A lot of investing noobs will only look at yield and forget about their total returns. I have noticed my index funds (now I’m in Vanguard ETF’s in Questrade) have done a lot better than my dividend stocks in total returns with less risk.

        Our plan is to not totally retire yet (we are in our mid-30’s) but to work in the winter months in camp when there isn’t much to do anyways and enjoy the Summer in the Okanagan on the beach. We live pretty cheap and enjoy the fresh cheap produce that comes out of here in the Summer. We were planning to buy a home but this blog and the fact that we lost money on our last condo is making me rethink buying a bit.

        1. ” recently with the oil crash some of my oil holdings went down so much that I realized I need to be more of an indexer and less of a stock picker”
          – This is exactly what Garth saved us from. We wanted to chase yield with dividend generating stocks but he convinced us that indexing is better, and he was absolutely right.

          “We were planning to buy a home but this blog and the fact that we lost money on our last condo is making me rethink buying a bit.”
          – Good for you for having a clear head!

          1. I guess his recommendations would be a little different if you wanted a portfolio for a semi-retired couple who just want to work enough to pay the bills and invest more and not touch their portfolio yet and let it grow. I’m mostly leaning towards the couch potato portfolio model right now with some blue chip Canadian stocks and a REIT ETF along with it. I have 20% in VAB, 45% VXC, 3% VCN (which I want to sell my stocks and add to soon as well as with any new money), 4% REITS and 28% Canadian mostly blue chip dividend stocks like BCE, PWF, SLF, TRP and the banks.

            I would have a hard time taking money out of my investments to live on already. I just like watching them go up and adding to them for now. I got interested in investing in dividend stocks from reading Derek Foster’s book Stop Working but almost all of the things he recommended in that book he doesn’t follow himself. A couple of the worst stocks I have bought were stocks he mentioned to buy. The whole I’m retired at 34 scenario doesn’t really make sense to me until you say that when you are almost dead and never had to work since you were 34. Things could change so much in 50 years. How can people say they are retired at 34? I haven’t worked in 10 months myself but to say I’m retired sounds kind of silly to me. No one knows what the future holds. You might get really bored. You might find something else you like to do for money. Might get cancer and need thousands of dollars a month for cancer drugs. I see a lot of sick people who go to work for the free prescription drug coverage they get at work or the other benefits like dental for their whole family (or just because they want a corvette) etc. Food is getting expensive now. Especially food that is healthy and organic. We can sacrifice our health for saving money by cheaping out on healthy foods and we have nothing without our health. On my ten months off I have been really taking the time to focus on health. Walking 15km a day and lifting weights 5 times and week. Lots of organic foods and local grown foods. Lots of sun, water, fresh air and hiking. I hope you guys are eating healthily with your lifestyle. At least you probably have very little stress, that is a big help.

            1. Yeah, the Derek Foster-promoted method of Dividend Investing is actually a lot more dangerous than he lets on. In Canada, chasing yield in common stocks ends up in you focusing heavily on oil, gas, telecoms and financials. This creates a sector risk that most people don’t realize, and I can only imagine how much the recent oil crash must have sucked for him.

              And we early retiree types tend to have a different definition of retirement than most people. The common definition of retirement is “sit around and do nothing.” We define it more correctly as “no longer needing to work.” It doesn’t preclude us doing from doing anything productive (Hell, we’re probably busier now than ever), but we now get to pick and choose what projects we work on rather than having it forced on us by our corporate overlords. Financial Independence is the expansion of freedom, not the lack of work.

              1. “sit around, do nothing,” – and probably spending money on material goods and to make up for experiences that they missed out on

  18. I just used Derek Foster’s book as a stepping stone. In his first book he said you should only invest in Canada because it is so safe here, now he says his portfolio is all US stocks because he sold his Canadian ones when our dollar was at parity to invest in US stocks (meanwhile in his book he tells others to buy and hold forever and never sell). I think his current message is he is selling his US stocks that went up so much with the US dollar rising and buying cheaper Canadian stocks again. I can’t keep up with the flip-flopping. And I honestly can’t imagine how he can support his family of 9 people on dividends from around a million dollars. There is far better information on the internet about how to invest but his book was the one that got me interested in the retire early idea and started me reading about it online. Watching one oil position fall $7000 isn’t a turn on. Especially when you think if you had that money in the index you would have barely noticed it going down because of oil.

    I’ve still done pretty well because of when I started investing during the crash in 2008, and because most of my portfolio was in index funds. And I used to have a lot of exposure to Canada with dividend stocks, not so much anymore. Indexing more and more. How about you are you diversified outside of Canada or do you like to stay mostly invested within Canada?

  19. This is Great and makes me want to continue pushing forward with my Dividend Investing and finally being free from the 9-5 and having more time with my family. Keep it up. If you or your husband want to look at my blog you can: http://www.dividendmiracle.com

    1. We looked into dividend investing briefly, but found that it increases our risk (since individual stocks CAN go to zero, unlike indexing). But hey, if it works for you, that’s great!

  20. After read your website, I like your idea to invest Index fund and did my research and found TD also provide S&P 500 Index ETF at 0.1 management fee. Are they same as S&P 500 Index ETF provide by Turner Investments or Vanguard? Why no one mention this one?

    1. TD didn’t have that ETF back in 2012. This a new one for 2016 and worth checking out. FYI, you’ll want to check to the trade costs for this. If your portfolio is small, the trade costs could end up being a bigger percentage of your portfolio. Mutual funds include the trading costs.

      Thanks for mentioning it!

  21. Sorry, my questions may be a little bit silly since I never buy S&P 500 ETF before,
    What is the trading cost, do you mean to pay charges to buy the ETF.
    Can you explain the differences between TD, Vanguard and IShares. Do they have hidden cost for S&P 500 ETF other than management fee.
    Why IShares for S&P 500 ETF is $219.59, TD only $15.98 and Vanguard is $38.73?

    Thank you.

  22. Good job!
    We went thru the same process but we didn’t started with a high paying IT job. Y2K save the day though. With kid it took us a little longer but we got there now.
    Good advices on spending and investing. Probably will only work on people with real discipline though, most people won’t be able to resist the magic of having a few $$$ sitting idle in the bank.
    Went thru some of the blogs and CBC, can’t believe how many people are so financial illiterate.
    Yep, we also have SP500 ETF in ours, started right after 2008.

    1. We’re currently reviewing a few low cost brokerages. Once we’re satisfied with their performance, we’ll post the results and readers can follow along and copy our allocation if they so choose.

      1. Nice. Sparxtrading.com has good comparisons. Cdn couch potato sometimes discusses brokerages.
        Free etf trading/buying and free/near-free USD conversion may be useful perks of some brokerages

  23. Stock picking is not for the faint of heart. I do pick stocks, but it is a very small part of my portfolio.

    Fortunately, I have made more than I lost and have made money on an oil company before the crash.

    There is no point chasing yield. I owned Canadian Oil Sands, COS.to, when it was paying a yield of 8%. When I looked at the financials, it was bleeding cash, so I sold. Its dividend got cut, and it crashed a year later.

    When it comes to investing, I recommend ETFs. Using fundamental and technical analysis tools to find winning stocks are time consuming, and you need to dig deep into the financial statements. Even then, there is no guarantee it is a winning stock.

    1. Yup, that’s what we discovered. Picking stock doesn’t work and dividend chasing in Canada is a bad idea because of the sector risk. Had we gone with dividend investing, our portfolio would’ve been creamed during the 2015 oil rout. Index investing using low-cost ETFs are the way to go. Totally agree with you.

  24. As if to be contrarian towards the preceding comment exchange, I actually prefer picking individual dividend stocks over indexing.

    If you can reasonably gauge a business’s health and future prospects (not NEARLY as hard to do as some think), you can buy high quality businesses that have not only paid but RAISED their dividends every year for decades. Own enough stocks over a variety of sectors and you’ll do as good as any fund will.

    What’s great is that you have control over what companies you own rather than seeing companies go in and out of the fund because of the placement on the index (would you sell AT&T for the sole reason that Apple has a higher stock price?). It also takes price out of the equation; once you buy, you’re not concerned where the share price goes as long as the dividend gets paid. Indexing generally has you still hoping that the index price goes up and then ties you to the 4% rule. A good dividend investor, on the other hand, can live off the dividends of Coca-Cola, McDonald’s, and the like without ever touching principal. Even in retirement, a downturn would be trivial at best since the aim of a dividend investor is to never sell in the first place.

    Ultimately, both techniques will lead you to financial freedom because both have the same merits and strengths. Really, it’s the short term traders who stand to lose. Long term investors will always win in the end.

    ARB–Angry Retail Banker

  25. Great post! As a young adult just beginning to really start looking at investing and seriously keeping up with (or at least trying to) global markets this really gave me some needed insights. There are just so man options out there for where and how to invest and the complexity of it scares a lot of people away from even trying to understand the process. The whole idea of the stock market is daunting and I even studied finance in school. This post really broke it down in a nice and easy to read way and I will be sure to share it with my friends.

    Katy S
    May 2017
    A.B. Freeman School of Business / Tulane University

  26. I am a little hesitant to invest in index funds, mainly because I don’t want to support tobacco, alcohol, oil/gas, fast food and other companies that I disagree with. I have a small portfolio with only stocks in companies that I feel okay with supporting. I’m planning on keeping a moderate to high risk portfolio for the next four years or so and then toning it down. I’m looking to get more moderate risk investments, but still ones where I can SEE what I’m supporting, versus the black box of index funds/etfs. Ideas?

  27. Thanks so much for your fantastic articles! I’ve learnt so much.
    My question is, and it could be a bit far fetched or unreal, what happens if the companies managing the index fund or ETF goes bust in these black swan events? Do we rely on the fact that that’s super duper unlikely?

    1. The underlying assets are held by a separate company in trust. So for example, if Vanguard goes bust, you don’t lose the underlying assets.

  28. I have great respect for what you have accomplished. I also think you have an interesting investment style.

    However, this sentence should never be written when describing investments: “However, when held over sufficiently long periods of time (i.e. 15 years or longer), it is impossible to lose money.”

    I don’t know what your evidence is for this statement. But if the S&P was purchased as an index product ( which was not available) in 1928 or 1929 before the Great Depression, 15 years likely was not enough to produce positive returns.

    Of course: This is an extreme example. Great Depression(s) do not happen often; nor does war. However, your statement is equally extreme, particularly if it is based only on historical data. Overall, I respect what you are doing but you should stay away from absolutes when advising individuals on potential investment returns.

  29. Right here is the right blog for anyone who hopes to find out about this topic.
    You realize so much its almost hard to argue with you (not that I personally will need to…HaHa).
    You definitely put a brand new spin on a subject which has been discussed for years.

    Wonderful stuff, just excellent!

  30. As a scientist who has worked in many small pharma/biotech/bioscience startups, I can tell you that most of them are nothing but ridiculous pump and dumps. It’s easy to see they are just hype production mills, with mediocre staff, having no real track record of success. If you are only a technical trader it doesn’t matter, but people who are fooled into thinking the clinical trials these companies basically just buy, actually mean anything, are almost always disappointed.

    “lets blind them with science”

    The stories I could tell……

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