Welcome to the Money Maple Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom.

One of the life-changing steps in my personal finances was to switch to index investing. Today, I’m being joined by another fan of ETS, Kornel Szrejber. Kornel is being the popular podcast, Build Wealth Canada. You can find him at buildwealthcanada.ca.

Before we chat with Kornel I wanted to point out the 2016 survey from CPA Canada where 33 percent of those polled recorded being a victim of fraud. Our sponsor, Borrowell, offers free credit reports so you can verify the information against identity theft; what debts are in your name and how much is owed. Head over to maplemoney.com/borrowell to review your credit report today.

Now let’s talk with Kornel…

Tom: Hi Kornel, thanks for being on the Maple Money show.

Kornel: No problem, Tom. Great to be here.

Tom: I want you on today to talk about how you invest. I know originally you were focusing on paying off your mortgage. You became quite well known for doing that but now you’ve gone into investing. I know even at the time you were you were talking about how you should’ve been investing while doing the mortgage. But, now that you are where you are, you’ve been focusing a lot on investing. So what kind of items are you investing in?

Kornel: Ever since they started, really, I just do passive investing just through broad market index ETFs. That’s all I do. My entire investment portfolio is basically in that. We had some rental property as well for a while until very recently. Last week, actually, it closed. We actually sold off all the rental property and now that money is also going towards basically broad market index ETFs as well. That’s going to be in additional to focusing on being a landlord which is nice. I’m now 100 percent into the passive investing role which is wonderful.

Tom: I know I had this problem, but for your story, why did you choose ETFs over mutual funds?

Kornel: I researched it a lot because our big thing was that we paid off our mortgage really early. I was 28 I believe when we did that. Well, before our 30s anyway. But as soon as we paid that off we still had the same lifestyle but now we didn’t have a mortgage anymore so we thought, now we have to invest because we weren’t paying off our mortgage, we weren’t saving for retirement—and that isn’t necessarily how I would do things if I was to do it over again. That’s a whole other story. So I researched a lot and decided what the best way to do it was. At the end of the day I just chose doing ETF investing in the broad market index. I did that over mutual funds for a few reasons. The big one is the fees. I remember hearing some stats that you can save hundreds of thousands of dollars by doing it through ETFs as opposed to the traditional mutual fund approach. And at first I thought that sounded a little too good to be true. I mean, that’s way too high of a number. That doesn’t sound right. So I actually did the math and looked at what fees ETFs charged and what fees do typical mutual fees in Canada charge. I did the math and I was actually hundreds of thousands of dollars. It was true. And that’s crazy, right? I look at what I pay right now in my portfolio versus a typical mutual fund that’s at 2 ½ percent MER and it is17 times more expensive than what I pay. So imagine, you can buy some investments and pay a dollar for it or you pay $17 for it. That’s a very strong case to … I mean, I don’t know how much more needs to be said about that because that’s a very, very strong reason for it. But one could argue saying, “Wait a minute. Okay, $17 is more expensive but maybe it performs 20 times better.” Maybe you can make that argument but that’s not true either. So the S&P has a really good site where they actually look at actively managed funds and compare them to the index to see how many actually beat it. I checked it before we interviewed today so I had the most recent stats in Canada. Basically, 81.69 percent are actively managed funds in Canada and underperform the S&P index over the Canadian Index over the last 5 years. If you look at the U.S. it’s 84.23 percent underperformed. So, you’re paying all these fees and they’re really dragging down your returns. At the end of the day, once all is said and done, it’s extremely difficult to pick the winners. I mean, it’s possible. You could be in that 18 percent of so and you’re able to do it but the longer the timeframe gets the harder it is for these actively managed funds to consistently beat the market just because those fees are such a giant drag on performance. That was a huge, huge reason. The more research I did, the more I saw that it was the way to go. I’m very comfortable with it because I don’t consider myself a stock picker. I have nothing against that. I think it’s great for people that can do it well and devote themselves to it. And, if you’re that kind of person who doesn’t mind reading the annual reports and you like looking at the financial statements, then, for sure, pick your own stocks. There are definitely ways you can succeed with that in my opinion. But for me, the passive approach is great. That way I can have those investments in there. They take very little time to do and I can do different things in my life, basically. The other thing too is, if you’re doing mutual funds now you have to also pick which mutual fund manager you like. Who’s good and what happens if they leave from the fund that I invested in? There’s also that whole thing where we’re now worrying about which mutual fund, which mutual fund manager… Things change all the time. With the passive approach you don’t have to worry about that at all so that’s another big reason for that.

Tom: Yeah, that 2 1/2 percent extra that you pay for mutual funds… I think a lot of people—they don’t see as much. They say, “Yeah, I know I have to pay 2 ½ percent but what’s wrong with that?”

Kornel: Exactly.

Tom: But I like how you framed it as being 17 times more. I never actually did that math. Even the idea of 2 percent more—they have to outperform that and that’s not easy. Odds are they’re not going to outperform.

Kornel: Exactly, it’s really tough to do and it’s really hard for you as a retail investor to find those mutual fund managers that are able to do it, and are able to do it consistently which is a whole other thing as well. I mean, it’s really tough to do.

Tom: You mentioned not being a big fan of investing in stocks either. Neither am I. I played around with that a bit before. I used to have a lot of—well, I still have them—but a lot of Canadian dividend stocks. And there I was really buying and holding. I was buying large companies, a lot of utilities and financial in Canada and that seemed okay because I was saving from paying any sort of MER. I was also doing a Smith maneuver which is a whole other show…

Kornel: That’s right! Maybe a show and a half because—

Tom: Yeah, it’s a complicated thing that I don’t actually recommend to people but I was doing it. I bought a lot of Canadian dividend stocks then but now I’m basically all ETFs and finding new purchases especially when it comes to things like technology stocks. I hear people say, “Oh, I’ve got all this Apple stock and I’m doing great,” but I just can’t keep up with that because technology companies come and go and that’s why I’m not interested in it. Any other thoughts about stocks for you?

Kornel: Yeah, I think it’s great. If somebody wants to have that be their craft and that’s something you’re very passionate about I’m not, “Oh, stock picking is horrible. It doesn’t work, it never works.” That’s not true. I’ve seen it succeed. I know people that are able to do it successfully very well. I think you know I do a lot of work with FIBI research which is an independent research company where they actually analyze individual stocks in an unbiased fashion. So, I’m involved with them. The way I feel is, if this is your craft and this is what you want to do and you enjoy it, then you can definitely be successful at picking the right stocks. But, it’s not something that you—the way I look at it is, you either go into it or you don’t. You don’t just dip your foot in and say, “Okay, I’m going to invest in this stock because I like it.” Or for some totally subjective reason. You’re either going to be a passive investor (like what I do) because I don’t enjoy reading financial statements and I don’t enjoy that kind of component, or if you like that kind of stuff, go into it and learn everything you can—and learn from the best. That’s my view on it. It’s not like one is better than the other. You just have to decide what kind of investor you want to be. And yes, if you do decide to pick stocks and you learn how to do it well, then yes, you can beat the market. Yes, you’re not paying MERs while I’m paying MERS. Yes, you might get better returns than me but only if you do it right. And there’s a lot of people that go into it without that kind of commitment and they get burned by it quite severely. People that I’ve talked to that have really committed to it have done well with it. That’s my two-cents worth on that.

Tom: Yeah, if you can pick the 10 best stocks, you’re going to be doing great. Otherwise, though, it’s hard to beat that diversification you end up with ETFs. You’re buying into the entire market. You’re not just trying to get that hot stock.

Kornel: I like the passives too because it’s nice not out to worry about it. At the end of the day I don’t want to be worrying about it when I go to bed. Based on my personality and my temperament, if I was very heavily into individual stock—and I’m not talking about betting on two stocks, I’m talking about having a nice diversified portfolio of stocks that’s 20-25 stocks. Even if I did that, I’d still always be thinking about whether anything has changed. I always have to be analyzing and staying up-to-date about it and all that kind of stuff. Whereas, with the passive approach, it’s just a better fit, I find, for my personality because I know historically it has gone up significantly long-term. I know if I hold it and don’t panic until I know historically that it’s done consistently well over the long-term, it’s nice not to have to think about it and worry about it. Just check it every once in a while to see how much money you have made. Basically, it’s great. It’s just a good fit for me, personally.

Tom: There is one time when I was sort of anti ETF. And you may be interested in this since you are no longer being a landlord; when it comes to REITs, the REIT ETFs I’ve seen normally have a bit of a higher expense ratio. At the same time, I can’t remember the exact percentages right now, but I think it’s like three or four of these REITs actually make up more than the majority of the entire index. You can actually buy these individual REITs. I’ve got them in my TFSA. That’s the one time where I still go out of my way to not do ETFs just because it’s just a bad mix. It doesn’t take much to actually be in that entire index and you can save that fee. It’s still not a huge fee. Off the top of my head it might be.75.6 or something like that. But it’s still a higher fee and it’s really not giving you a lot of breakdown.

Kornel: For things like that, if you’re going into specific sectors because that’s the kind of way you want to invest, that’s your strategy or style, then yeah, I can see how it being better in certain cases. Like you said, just buying those stocks directly because, we know when you get into some of these specialized ETF (if that’s your thing) their MERs do tend to be higher than just the broad market index so you’re paying more for that. Especially in Canada, in particular, we are so heavily concentrated in certain areas. There are certain ETFs where you’ll have just a few players making up nearly 70 percent of the ETF. And some might say, “Well, why don’t I just own those four companies? There you go, I save myself the MER.” I’m fully with you on that one if that’s the way you invest. I can see how it can totally make sense. I’ve heard of some people doing that with the aristocrat index as well. That’s for the people who really want the income stocks where the MMR is higher and a lot of it is held by a few key players so you can just buy those players instead and avoid the EMR altogether.

Tom: That’s basically what I was doing when I was buying Canadian dividends. I didn’t go out of my way but I certainly remember looking at those lists to see which of them had the biggest yields on them and hoping it would continue, of course, too. How do you buy ETFs? If someone’s ready to do this, where should they go? Where did you go and how did you get that going?

Kornel: You mean, what are the mechanics? How do I buy the whole thing?

Tom: Yeah. If someone’s convinced that this is what they want to do and get out of mutual funds (which I hope they are) what can they do next to do that?

Kornel: If you’re still not sure, just think about that 17 times number. That should put things in prospective. When it comes to me buying ETFs, I basically buy the same four ETFs every month so it’s not a lot of work. If you’ve ever bought an ETF it’s basically just like buying the same four stocks every month. But the big thing with ETFs is that you’re not buying a company. One ETF can have hundreds, even thousands of stocks within it. So that’s really all I do. I use Questrade. I’m a big fan of them. I don’t work for them or anything like that but I do like them a lot because they allow you to buy ETFs for free, essentially. You do pay an ECN fee which we can talk about but basically it’s pretty much free. You’re pretty much talking pennies when all is said and done. Under a dollar I’d say. You do pay a fee when you sell. But if you’re not retired yet, you’re not really going to be selling them either. Or if you are, it’s going to be very periodically. If you’re doing more of a buy and hold kind of strategy (which is what I do) you’re pretty much buying them free and when you sell them eventually, yes, you’ll pay maybe $5 or $10 a trade. But those fees aren’t very much. The ECN fee, I actually looked it up before the interview is .00335 per share. That’s less than a penny per share. I mean, if you buy a few thousand dollars of ETFs you’ll pay something like 50 cents. It’s nothing. That’s the way that I do it.

Tom: I’m with Questrade as well. When they started making ETFs without the transaction fees, that’s when ETFs really started making sense to me. In between my time in bad mutual funds—I was with the TD e-Series because I could make those—I don’t remember if I was doing 2 weeks or a month, but I could make that regular contribution and it wasn’t costing me. Back when you had to pay for each ETF, if you were putting money in every two weeks or a month and you weren’t making a big purchase, that transaction fee was kind of killing some of the benefit of the ETFs. But now it’s roughly no fee. I think that makes it a lot more accessible to people.

Kornel: For sure. I think one thing really worth mentioning— and some people really get held up on this is that they think they’ll need thousands and thousands of dollars if they’re going to invest in ETFs. They think they need thousands and thousands available because they don’t want to buy just $1,000 of ETFs. They want to wait until they have more because they’re paying $5 or $10, whatever it is now per transaction. If you go with Questrade, for example, that’s not true. You’re basically buying it pretty much for free so you can buy these really, really, small amounts. I read every guide out there I could find about how to do this when I was first getting started and that was one of the common things; while ETFs are great, if you have quite a bit of money to invest, because the transaction fees are really going to hurt you, there are places you can buy ETFs for free so you don’t have all those transaction fees hurting you. Don’t let that hold you back if you $1,000. In fact, in the ETF investment courses I have, I’ve had people ask me questions like, “Do I have enough to invest? Should I wait before I do it?” That kind of thing. Even if you have just a little bit of money go and do it because you will learn the mechanics of it. You’ll become comfortable with it because you’re able to buy these ETFs for free and it gives you a chance to kind of get your feet wet and get familiar with everything, feel comfortable with the interface, how to buy… It makes it less stressful for you because you could go and buy one ETF for about $50 and it costs you less than a penny to do that. And there you go; you just did your first transaction. Now you can do $100 and before you know it, you’re doing maybe a $5,000 transaction and you’re not breaking a sweat. You’re 100 percent comfortable with it. I really like how they do that too because it lets you kind of ease into it. Because, I mean, imagine it’s your first time buying it and you’re like, “Oh, I have $100,000 to invest. Yikes, where do I even start?” It can be very intimidating at that point if you’ve never done it before.

Tom: Yes, and making a mistake with would start to really matter. When I first started with Questrade the screen to pick up your stocks and stuff was a little bit intimidating. A little bit of practice does help where you’ve got all these different choices and stuff beyond just buying it. I do remember being kind of intimidating at first.

Kornel: For sure.

Tom: But, like you said, if you’re trying it out with $50 there’s not really any pressure there. It’s basically just testing it out and getting used to it.

Kornel: Exactly. I’m a big fan and believer in that. Start small. Get comfortable with it. Then you’re set.

Tom: I should point out too, there’s certainly other places other than Questrade that offer free ETFs. Some of them have different catches though. I can link to them on the show notes but I know some will only offer it on a certain ETFs.

Kornel: Yes.

Tom: And when you’re doing a simple portfolio that’s probably good enough. No problem. But it’s good to point out that sometimes you don’t get those extra options. I’ll link a few in the show notes because I can’t think of them all off on the top of my head right now.

Kornel: Yeah, I remember I looked into it and I remember Virtual Brokers was one that comes to mind. I remember they had the free ETF buying as well. At the end of the day I was debating between Questrade and Virtual Brokers and I remember Virtual Broker’s (at the time) only had it for certain ETFs whereas Questrade was much more open to what ETFs you could buy. I liked how there wasn’t a restriction. And I think there might have even been some ETFs that I wanted to buy that I couldn’t get for free which may even have been the case. But you’re right, there are others. Virtual Brokers and Questrade are the only two that that I know of. I know a lot of the banks will do certain promotions—things like giving 100 trades free and such which is nice but what happens after that, right? I like the fact that with Questrade, it’s ongoing. I’ve been with them for years now and they’ve had it the entire time. I even interviewed CEO of Questrade and asked them, “Hey look, are you guys going to remove this? Because I really like it. And I’m telling people to go with you guys…” But I get nervous because it’s such a good thing for us. He said they didn’t have any plans to remove it. They may not allow it on some ETFs in the future, but right now that really wasn’t on his radar or anything like that. So things look good on that front. I’m still staying strong with Questrade.

Tom: You mentioned you have four ETFs in your portfolio. What are those and why are you using those funds?

Kornel: This is for the equity portion. Right now, for Canada I’ll have XIC which is basically the S&P TSX index, kind of a Canadian market, if you will. For U.S. I use two. I starting using one and then I flipped to another but they’re both just as good depending on your personal preference. So, I use the VUN and VFV’s. The VFV is the S&P 500 index which is one Warren Buffet says to invest in. It does really well. It’s a good investment, let’s just say that. Then the VUN is basically the total market. I hope I’m not mixing the two up. I’m pretty sure my memory is working correctly here. That one is more total market so you’re including some smaller companies as well as opposed to the 500ish companies that you get in the S&P 500. The whole logic there was, I started doing the total market one which was of the VUN because historically there’s some data that suggests that that one should theoretically outperform the S&P 500 because it includes more companies that are inclusive. And, there are more smaller companies which tend to be more volatile but in the longer term they’re more likely to grow so you might get higher returns with them. That’s kind of the whole theory behind it. But in recent time what’s happened is that the S&P 500 has actually been outperforming the total market index. Theoretically this is what should be happening. But what’s been happening lately is the other one. For a while I thought, “Okay, let’s invest in the S&P 500.” But I didn’t sell VNV, I still held onto all of it. I didn’t touch it I just said, “Let’s get some S&P 500 instead.” But basically, either one of those are good. I would feel totally comfortable in either one of them. Then for the international ones I have XEC and XEF. XEC is the emerging market so I have 10 percent of my equity portion in that. Then I have the XEF which is more of the developed—like Japan, Europe, that kind of thing. I have 23.33 percent in there. Basically, the international component together, if you add them up, is a third and then Canada’s a third then U.S. as a third. And recently we kind of became financially independent so I’m actually considering whether I should have some bonds in there because we’ve been 100 percent equities for so long. And now that we’ve hit our magic number I’m thinking we should add some bonds in there. That’s something I’m looking into pretty heavily now.

Tom: It sounds like you’re exactly where I am. I don’t know how bonds either. It’s not that I wouldn’t recommend it. I just turned 41 and think people should have bonds at that age. I think I’m a little more willing to take a bit of risk. And truly too, not just thinking I can. I haven’t had bonds but I’ve been very purposeful about that. But for most people, yes, I would recommend maybe doing that classic couch-potato of 25 percent bonds, 25 percent international, 25 percent Canadian and 25 percent U.S. It’s a nice blend that would cover a lot of people. I like the way you’ve gone where you’ve got the emerging markets in there as well. There is certainly a different portfolio for people in trying to decide how they want theirs to look. In my case, I’m doing very similar to you; a third in each of those buckets.

Kornel: Cool. That’s good to know. For those listening, Tom’s and my portfolio, obviously, would be perceived as highly aggressive because we are 100 percent equities. I feel very comfortable with it. Tom seems comfortable as well but it’s not for everyone. Make sure you learn about this some more. Typically, you should have a lot more bonds than Tom and I do. I think you and I are a bit of a different breed as well.

Tom: Yeah, we are, I guess. Okay, can you tell me where everybody can find you and what you’ve been up to?

Kornel: Sure. I have a podcast that’s been a top ranking podcast in Canada for personal finance and investing for over three years now called, Build Wealth Canada. If you go to buildwealthcanada.ca you can sign up for when new episodes come out. There are all kinds of different guides. If you sign up too, you’ll get information on the top tools I use for personal finance and investing. Then I have an ETF investing course as well which you can find at buildwealthcanada.ca/invest. So yeah, come check it out. Check on the podcast as well. You can catch me there.

Tom: Thanks for being on the show Kornel.

Kornel: Thanks for having me Tom, it was great.

Thanks again to Kornel for joining me. You can find the show notes at maplemoney.com/kornelszrejber. And, if that’s too hard to spell just head on over to maplemoney.com/show where you can find his episode. Are you a new listener and like what you’ve heard? Head over to maplemoney.com/itunes where you can subscribe so you don’t miss any episodes. Leave a review to let me know what you think.