The MapleMoney Show » How to Invest Your Money » Stocks

How to Invest in a Volatile Stock Market, with Kanwal Sarai

Presented by EQ Bank

Welcome to The MapleMoney Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. I’m your host, Tom Drake, the founder of MapleMoney, where I’ve been writing about all things related to personal finance since 2009.

In recent weeks, the arrival of Coronavirus in North America has wreaked havoc on the stock market, bringing with it fears of a sustained economic downturn and talk of a possible recession. And while no one really knows how it will all play out, there are steps investors can take when faced with a volatile stock market.

With everything that’s going on, it felt like the perfect time to have this week’s guest join us. A dividend value investor for more than 20 years, Kanwal Sarai is the founder and editor of The Simply Investing Report. At the end of the episode, stay tuned for a special offer Kanwal has extended to MapleMoney readers!

Kanwal’s first piece of advice in dealing with market volatility is to avoid the stock market with any money that you plan to spend within the next 5 years. Your long term investments, what Kanwal refers to as your core holdings, should comprise of high-quality dividend value stocks. Your core holdings would include your RRSP and any long term TFSA holdings you may have.

Kanwal’s investment strategy is centred around dividend value stocks. As an investing educator, he’s created what he calls The 12 Rules of Simply Investing, along with an online course and newsletter. According to Kanwal, any company worthy of holding in his own stock portfolio needs to pass the 12 rules. Let’s take Rule #1, for example: Do you understand the product or service that the company is offering to their customer. In other words, if you can’t explain what a company does, you should not be buying the stock. In the interview, Kanwal goes on to cover all 12 rules.

If, after listening, you’re interested in signing up for Kanwal’s Simply Investing course and/or newsletter, he is offering The MapleMoney Show listeners a discount of 15% on both! Head to The Simply Investing Course or The Simply Investing Report and use the coupon code MAPLEMONEY 15.

Our sponsor, EQ Bank, has partnered with TransferWise, to give Canadians a better way to send money overseas. The result is fully transparent and remarkably quick international money transfers that are up to 8X cheaper for EQ Bank customers. To find out more, visit EQ Bank

Episode Summary

  • How to respond to current market volatility
  • Factors that affect risk tolerance
  • How you should invest your core holdings
  • The 12 rules of Simply Investing
  • Always keep your emotions out of investing
  • The problem of over-diversification
  • Why not everyone should hold bonds in their portfolio
Read transcript

In recent weeks, the arrival of Coronavirus in North America has wreaked havoc on the stock market, bringing with it fears of a sustained economic downturn, including talk of a possible recession. While no one really knows how it will all play out, there are steps investors can take when faced with volatile stock market. With everything that’s going on, it felt like the perfect time to have this week’s guests join us. A dividend value investor for more than 20 years Kanwal Sarai is the founder and editor of the Simply Investing Report. At the end of the episode, stay tuned for a special offer Kanwal has extended to Maple Money Show listeners.

Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. Our sponsor, EQ Bank, has partnered with TransferWise to give Canadians a better way to send money overseas. The result is fully transparent and remarkably quick with International money transfers that are up to eight times cheaper for bank customers. To find out more, visit Now, let’s chat with Kanwal…

Tom: Hi Kanwal, welcome to the Maple Money Show.

Kanwal: Glad to be here, Tom.

Tom: Right now we’re in the middle of a very interesting stock market. Things are going up. Things are going down. I don’t even know what it’ll be like on the day we publish but as we’re recording this, it’s been very interesting. First of all, what’s your thought about what this looks like in the media and everything? Are people freaking out too much or is this legit? Where are we at?

Kanwal: I think it’s slightly overblown. Time will tell where things end up in the next six months. Nobody knows. Especially, with the stock market, I don’t know what the market’s going to do next week, next month or next year so it’s difficult to say. I’ve got a lot of emails in the last five days from people who are freaking out and asking about, whether they should sell everything or buy everything? And what’s going to happen? I can’t predict where the market’s going to go. I don’t think anybody can predict accurately where the market’s going to go. My approach is to wait for the dust to settle a little bit before we do anything. And the other thing is you want to be careful selling when things are low because that guarantees you’re going to have losses. It solidifies your losses unless you bought something 10, 15 years ago when it was a lot cheaper then. But if you bought something a month ago and now you’re going to sell it, you’re going to solidify your losses. People have asked me how much money I’ve lost this week and I tell them nothing because I haven’t sold anything this week. I still have all my stocks. So I haven’t lost anything. So you don’t really lose anything until you sell. So you want to be careful. My rule of thumb is to have patience, remain calm, wait for the dust to settle and let’s see where things pan out.

Tom: Well, that’s a great point. I saw someone mention in a Facebook group. They admitted they were pretty new to investing but this week they pulled all their money out. They didn’t say what amount that was. If they just got started it’s probably not a big deal. But they said they were pulling all their money out because they believe it’s going to go lower over the next couple of months. I didn’t respond to it but my thoughts were, “Wow, that’s a terrible decision because maybe it was a decent amount of money.” And to say they pulled all their money out to the bottom where maybe it’ll continue to grow for the next two years or something like that. So now they’ve really locked in that loss and they’re just going to watch it continue go up waiting for some drop that may not come for years.

Kanwal: Absolutely. When it comes to investing in stocks, whether you’re buying individual stocks or you’re buying ETFs or index funds or even mutual funds, at the end of the day you’re still buying stocks whether directly or through one of the funds. When it comes to investing in the stock market, what I always teach people is, if there’s any money that you need in five years or less… Let’s say you want to buy a house or you want to go on vacation or you need to buy a car or anything, if there’s any money that you need in five years or less, do not put that in the stock market because in the short term, the market is volatile and we’re seeing that right now. It’s coming down. We’ve had a nice 11 year bull run. It’s been awesome for the last 11 years and now it’s coming down. Investing in stocks is long-term. My approach is that it’s a long-term strategy. This is money that’s going to be in your RRSP, 401k (for the American listeners) or even into TFSA for 10, 15, 20 years. This is money you want to retire off of eventually. You’ve got to take a long-term look. And when you look at the stock market returns over the last 100 years, you can see the stock market goes up. If you look at it six months or three months or a year, it’s going up and down. But in the long run, the market has done consistently well.

Tom: With a market like we’re seeing right now, I think it’s the real test of people’s risk tolerance. You can always say, “Yeah, I get all of this. I know it’s going to go up and I’m fine with that. And I want to go 100 percent stocks and I’m totally tolerant.” People might be finding out right now that that’s not always the case. What are your thoughts about knowing your risk tolerance and maybe even before that—what is risk tolerance?

Kanwal: To me, risk tolerance is how much risk are you willing to accept? And it’s very different from person to person. There are so many factors involved. Do you have a day job? Are you self-employed? What’s your salary? Does your spouse or partner have a day job? And are they making six figures? How much money do you have saved up for a rainy day fund? Are you sitting on $5,000 or are you sitting on $80,000 or $100,000? All of those factors are going to make up your risk tolerance. How much tolerance are you willing to accept which is very different. On a scale of one to ten, somebody might be a 10 where they’ll take any risk possible where they’re going to buy Bitcoin today versus somebody who’s very conservative on the scale at one. They don’t want to see their ETFs, mutual funds or stocks go down even $5 or $10. So to answer your question, risk tolerance is how much risk are you willing to accept? It’s different for everybody. And this is what I tell all of my students. If you’re not able to sleep at night because you’re worried about your stocks or ETF or index funds or mutual funds then you’re probably better off putting your money in GICs and bonds. But then you have to accept that the returns are not going to be very good. How much can you get in a savings account these days? But that’s the reality of it. It’s so very different from person to person.

Tom: I think I go the other direction. I am apparently very tolerant to risk but I’m concerned that maybe I go so far that it’s more of a head-in-the-sand kind of thing. I normally invest in ETFs but I do like to make the occasional dividend investing. A couple of stocks I was noticing this morning, Obsidian Energy and Alcanna, I had bought at least five years ago. I saw them going down in the past but I really realized today that they’re pretty much sitting at 100 percent loss. Not exactly because these companies are still running, I believe, but they basically lost all their money. Now, thankfully, combined, it was only $1,500. So it’s a bit of a little speculation into energy. I’m okay with a little bit of gambling money if you want to call it that. Can you go too far like that? Is there something where you don’t go totally head-in-the-sand and you still have to pay people to actually watch your investments?

Kanwal: Absolutely. There are a couple of things here. It’s a great question. It’s a great comment. Very sorry to hear about where those stocks are today, Tom.

Tom: I like to admit all my mistakes on the show.

Kanwal: You know, nobody knows where the stocks are going to end up in the next 5, 10, 15 years from now. But like you said, it wasn’t too much money so that’s good. The way I like to look at it and what I’ve been teaching for the last almost eight years now is you’ve got to think of your savings or investments in two different buckets. There are your core holdings which is the money you expect to use in retirement. When you’re done and you don’t have a day job anymore you have to cover all your expenses. Where is that going to come from? It’s going to come from your core holdings, your core investments. What I do is, for the core holdings, I don’t speculate at all. So I will not be buying high-tech companies or Tesla or Bitcoin or any of those. When people hear that they figure I’m against all of these tech stocks and everything else. For the core holdings, which is 85 to 90 percent of your money, should be in safe, reliable, dividend stocks. I have a 12 step process—12 rules of simply investing. It’s a checklist where we go through the 12 rules. I have a link I’ll send to you to put up on your site.

Tom: Yes, we’ll add it to the show notes.

Kanwal: Yeah. And if we have time in a couple of minutes, I’ll actually go through the twelve rules. I’ll tell everybody what the twelve rules are. If a company passes those 12 rules, it is a quality company. That’s a company that belongs in your core holdings. That’s going to be 85 to 90 percent of your savings—in your core holdings, because that’s what’s going to cover your living expenses going forward. The second bucket is the one, like you said, where you can speculate. If you want to buy some stock in Tesla, Facebook, Twitter, a technology company or even energy companies then you can do that because if things go bad, that is not going to affect your lifestyle. It’s not going to impact your lifestyle and it’s not going to impact your retirement. Now, when I talk about retirement, most people think 65 years old. I have clients who’ve taken the course who’ve retired at the age of 40 or 45. They don’t need a day job because their core holdings are generating enough passive income that it covers all of their living expenses.

Tom: Yeah, and who wants to retire at 65 nowadays? It’s not the sexy thing at all, apparently.

Kanwal: Everybody’s talking about FIRE, right? So, the sooner you can do it, the better it is for you.

Tom: Let’s go back to the 12 points to look for. Again, I picked some stocks this past week but on Monday, the market dropped. And that night, I set up some orders for three of the major banks. There wasn’t a whole lot. I didn’t go through a nice 12-step-list. I just knew these banks were at prices from about six years ago and the dividend yield looked nice. That’s about as far as I went. I just moved some money out of cash. What are your 12 steps that people should be looking for?

Kanwal: I’m glad you looked at the yield. You looked at the stock price and kind of looked at where it is today. That’s great. That’s a good first step. Here is what I call the 12 rules of simply investing. Rule number one; do you understand the product or service offered by the company? And that’s just the general idea. You don’t need to be an expert in what the company does. You just have to have a general idea of what they do. How does somebody like the Bank of Montreal make money? They’re a bank. They offer financial services, mortgages and investments. That’s how they make money. McDonald’s is even easier. How does McDonald’s make money? They have restaurants all over the world and they sell food. So that’s step number one. If you don’t understand what the company is doing—if you couldn’t explain it to your grandmother or a 12-year-old, then you should not be buying that stock.

Tom: Yeah, that’s when you get into the strange start ups things and things you just don’t understand at all.

Kanwal: Absolutely. And remember, we’re talking about the first bucket; the core holdings. This is your life savings in here so you want to make sure they’re safe, reliable companies that you’re investing in. Let’s move on to rule number two. Will people still be using this product or service in 20 years? Here we want to avoid companies that are fads, something temporary like the Rubik’s Cube which was a big thing in the 80s. Nobody needs them anymore. The reason for this rule is very important. You want to invest in companies that are going to be around for 10, 15, 20, 30, or 40 years. They’ve got to be around for a very long time because you’re investing your hard earned cash into those companies. That’s rule number two. Rule number three; does the company have a low cost, durable, competitive advantage or a lasting competitive advantage? The best way to explain this is to borrow Warren Buffett’s example; think of a company as a castle. That’s your corporation. What do you have around the castle? You’ve got a moat. And the deeper and wider the moat, the better it’s going to be able to defend itself against competitors. Look at a company like Coca-Cola. They operate in over 125 countries all over the world. They’ve been around for a very, very long time. They’ve been paying dividends, I believe, for over 100 years. You can take a Coca-Cola logo anywhere in the world and just show it to somebody and they immediately know what you’re talking about. It’s a soft drink. If you were to start your own soft drink company today from scratch, think of how much money you would have to spend— billions and billions of dollars in marketing and advertising. And you still wouldn’t get to where Coca-Cola is today. Well, you might get there in 20, 30, 40, 50 years, but not likely. Companies like that have a very strong competitive advantage because they’ve been around for a very long time. One other quick example is McDonald’s. If you want a Big Mac, there’s only one company in the world that can give you a Big Mac, and that’s McDonald’s. You will cross the street and pass Wendy’s or Burger King (even though they’re closer to you) and go over to McDonald’s because that’s what you want. It’s the same thing with other products and services. Let’s move on to rule number four; is the company recession proof? We only want to invest in companies that are recession proof. Again, remember, it’s your hard earned cash. You don’t want to put it in companies—we’re seeing that right now. What’s happening to the airlines right now? Normally, where there’s a recession, a market downturn… Let me ask you this; if there’s a chance that you might get laid off from your job, are you going to go out and buy a new car tomorrow or next week? Of course not.

Tom: Good point.

Kanwal: You’re going to keep the car you have or you’re going to start taking the bus. We don’t know when recessions happen. Nobody can predict them. We don’t know how long they last. So just to avoid that risk we’re only going to invest in companies that are recession proof. Think about it. Even if you lose your job, you still have to brush your teeth. You still have to eat. At night when you come home, you’ve still got to turn the lights. And in the winter you’ve got to heat your home. When there’s a recession, all the stock prices come down but these companies that are recession proof tend to have a bit of a cushion. They don’t go down as drastically as some of the other companies do. Does that make sense?

Tom: Yes.

Kanwal: Okay, rule number five; does the company have consistent earnings growth? We generally look at an EPS growth of 8 percent or more over the last 10, 15 years. So rule number five we’re looking for companies have a history of profitability. We’ve got to see the EPS going up year after year after year. If it goes up and down, up and down and we have negative ESP’s, just avoid it. I don’t care how much you love the company. If it doesn’t pass rule number five, you’ve got to move on to the next one.

Tom: So don’t just look at the current EPS. You’ve got to have a look at it over time.

Kanwal: Exactly. At least 10 years or more. And the chart should go up. That’s what it should look like. It should be a graph going up. Rule number six; does the company have consistent dividend growth? Again, we’re looking for at least 8 percent growth over the last 10, 15, 20 years. So you want to look at the history and you want to see the dividend. Also, if you plotted on a graph, you want to see the graph line going up. This is important because this is your passive income. This is the money that’s coming into your core portfolio. Eventually, you want to live off of that. So a company that has a history of growing their dividend. For example, Johnson and Johnson. They have had 56 years of consecutive dividend increases. I’m going to say that again, 56 years of consecutive dividend increases. Coca-Cola has had 55 years. Procter and Gamble has had 61. When you look at companies like that, think about all the stuff that’s happened in the last 50 years; recessions, 2008, 9/11, all these things. Companies like these have continued to increase their dividend year, after year, after year.

Tom: Yeah, that sounds like a good way to make it a little safer for people.

Kanwal: Absolutely. With all of these 12 rules we’re trying to minimize the risk. We’re trying to minimize the risk to your capital. You work really hard for your money and you don’t want to lose it. So that’s what we’re trying to do. One last thing before we move on to number seven. I can’t predict the future so I don’t know if Johnson and Johnson are going to increase their dividend next year but when I look at the history where they’ve had 56 years of consecutive growth, I have a high degree of confidence that they’re going to increase their dividend next year. If not, keep it the same, at least at a minimum. I have a high degree of confidence that will happen. So that’s important. Rule number seven; does the company have a low payout ratio? We look for a payout ratio of 75 percent or less. I’ll give you a really quick example. Let’s say a company had earnings per share last year of $1 and their dividend is $2. What’s wrong with that situation?

Tom: They’re paying out more than they’re making.

Kanwal: Absolutely. The payout ratio is 200 percent or… It’s over a 100 percent and that’s bad. You don’t want that because what’s the company doing? They’re borrowing money from somewhere to pay the shareholders a dividend. So we look for a payout ratio of 75 percent or less. The good example would be a company that has EPS of $1 and the dividend is 50 cents. That’s a healthy payout ratio.

Tom: Why would a company pay up more than they’re making? Is it just to keep investors happy?

Kanwal: The short answer is yes, temporarily. They’re hoping their EPS is going to go up next year so they can cover it. We’ve seen that in a couple of cases where companies have done that. That’s not a big deal. But if they do that consistently two, three, and four or five years in a row, now you’re looking at a problem where they will have to reduce their dividend or eliminate it altogether. Rule number eight: does the company have low debt? Generally, we look at companies that have a debt of 70 percent or less. There are companies out there today—and I don’t want to name any names but some have debt of 500 or 600 percent. And that’s crazy. I don’t care how much you love the company; you should not be investing in that company until they can get their debt levels back to normal again. The problem with high debt is your interest costs alone are going to be so high that when you get into a recession or a market downturn, (which may or may not be happening now based on what we’ve seen in the last week) companies that have high debt are going to have a very, very hard time surviving this market crash. They’re going to have to cut their dividend. They have to eliminate the dividend. Worst cases like we saw in 2008, companies actually went bankrupt. So, again, we’re trying to minimize the risk to you. So look at companies that have low debt. Rule number nine; does the company have a good credit rating? We look at the S&P credit rating of triple B plus or greater. I can go into more detail but we’ll skip it for now. If anybody is interested, shoot me an email. For rule number nine, if you’re looking at two different companies and one has a credit rating of D-minus and another one has triple-A, all things considered equal, invest in the company that has a triple-A credit rating. That’s all I’ll say about that. Rule number 10; does the company actively buy back its shares? We’re only talking about companies that are financially healthy. They have very good management in place. When companies like that actively buy back their shares over time, it reduces the number of shares that are out in the market. And what that generally does in the long-term is it drives up the share price. So as an investor, it’s always good. You want to be able to buy stocks and have the value of those stocks go up over time.

Tom: And why does a company buyback their shares? Is that just to own more of their own company again?

Kanwal: Yes. Great question. There are a couple of reasons for that. One is to bring ownership back into the company. The share price is going to go up over time anyway. And the other thing is companies that are doing this intelligently, will generally time it when their own shares are undervalued. So that’s always a good thing. But generally, it’s to bring ownership back to the company. Rule number 11—I love this one. This is my favorite one. I have never broken rule number 11 in 20 years. Rule number 11: is the stock undervalued or priced low? This is a big one. Everybody talks about buying low, selling high. Well, how do you know when a stock is low? That’s when we cover and rule number 11. It’s in three parts; A, B and C, so. Part A is to make sure the PE ratio is 25 or less. B; you want to look at the current dividend yield for a company and compare it to its average dividend yield. For example, BMO. I don’t know what the yield is today but let’s just say the current dividend yield today has to be higher than its average 10 year dividend yield then the company is undervalued. And we go into a lot of detail in the course and actually teach you how to calculate that yourself, where to get the values. We don’t have two hours on the podcast here, so I’ll skip that. But again, any questions just shoot me an email. I’m more than happy to answer those. But we do cover that in detail.

Tom: Yes, we’ll go into the course at the end because I certainly don’t want to make you give away the whole course on this episode.

Kanwal: And then rule 11, Part C is the P.B. ratio which is the price-to-book ratio. It should be three or less. Again, all things considered equal, if you were looking at two companies and you’ve got one company that’s trading at book value (or very close to it) and you’ve got another company that’s trading at $200 a share or something way past the book value, all things considered equal, the company trading closer to book value is going to be a much better value for you. To keep it simple, if a book value is $20 a share and the stock price is $21, that’s a great deal. But if the book value is $20 a share in the stock prices is $195, not so much. Okay, we’ve got the last rule here. And the last rule has nothing to do with financial data. It has nothing to do with looking at charts and graphs or anything. It has everything to do with you, the investor. So rule number 12 is, keep your emotions out of investing. And I know it’s very hard, especially if it’s your money—it’s your family’s money. It’s easy to get emotional, especially with what we’re seeing today and in the last week where prices are coming down. You have to stay disciplined and remain patient. Like I said earlier, this is the long-term. If we’re investing for 10, 15, 20, 30 years, we’re investing for the long-term. So always have a long-term perspective and don’t freak out. If you buy a stock today and it drops tomorrow by $3 dollars, do not freak out. That’s normal. Stock prices go up and down all the time. If you’ve done the 12 rules, you’ve done your homework and you’ve invested in a company and it passes all the 12 rules, in the long run, you’re going to be fine. You’ve got to remain patient and disciplined. And disciplined at following the rules. They’re not optional. I have people sometimes emailing me who want to skip one or two rules. The rules are not optional. You have to make sure a company passes all the 12 rules. Otherwise, move onto the next company.

Tom: Well, that’s great. I love the 12th one because it brings it back around to this whole idea of the current market and what people can accept for risk. How does all this fit in the whole idea of diversification? With ETFs this is simple. You get your different markets, your stocks in your bonds… Everything’s very obvious. How do you do this with stocks compared to ETFs?

Kanwal: Yeah. Great question, Tom. I’m going to say something that’s going to be controversial for some people. I’m going to say it anyway because it’s what I believe and what I’ve experienced over the last 20 years as an investor. Over diversification can become a problem. There is a professor by the name of George who is a professor of finance at the University of Waterloo at the Ben Graham Center for value investing. He’s got a great article that covers over diversification and how it’s a risk for value investors. I get I can send you the link. We can probably put it up there because this would lead to another 45 minute discussion about that. But let me summarize it for you; when you buy an index fund, there could be thousands of companies in that fund. If you were to go out and buy an index fund today, for example, there are a thousand companies in that fund. We just went through the 12 rules of simply investing. Not all of those companies (today) are going to pass the 12 rules of simply investing. We talked about one of the rules about debt, rule number eight. All things considered equal, company A has a debt of 40 percent. Company B has a debt of 500 percent. Are you going to buy company B? Of course not. The debt is too high. So if you wouldn’t buy it as an individual stock, why would you buy that company within an index fund?

Tom: Fair enough.

Kanwal: The second question part is, not all of those thousand companies in the index fund today are undervalued. Some of them are overvalued. Again, if we follow the 12 rules, I’m only going to buy companies that are undervalued today—that are priced low. I’m not going to buy companies that are overvalued. And believe it or not, there are companies today, even with the market crash right now that are overvalued. And you should not be buying them. So if you wouldn’t buy them individually, why would you buy them as part of an index fund?

Tom: What are your thoughts on ETFs then? I can see what you’re saying, but at the same time, ETF have to be a good choice for a lot of people because not everybody is going to sit down and go through the 12 steps.

Kanwal: Absolutely. That’s a great comment. Can I get back to that in just a second?

Tom: Yeah.

Kanwal: About diversification, here’s the other thing. I find I get enough diversification with the individual companies that I’m buying. I’ll give you an example. Coca-Cola operates in over 190 countries. Johnson and Johnson operates in over 60 countries. McDonald’s is now in over 119 countries. And surprisingly, the Royal Bank of Canada RBC operates in over 37 countries. I understand the reason behind diversification. If there is a recession in North America, maybe Asia is doing really well and Europe is doing really well and I want to take advantage of that. Or, if there is a recession in Europe but the US and Canada are doing really well, I want to take advantage of that. By having all of these international companies operate all over the world, they can take advantage of that. They can take advantage of businesses really growing in Asia, “We’re going to make a lot of money there this year as opposed to in North America so we’re going to transfer more resources to Asia and that’s going to help drive up our profits and drive up the EPS and hopefully increase dividends because that’s what we care about at the end of the day.” I find by investing in these individual companies that are large companies, I’m already diversified geographically. So that covers diversification. Now, to get back to your question about does it make sense for people to buy ETF or index funds? And it absolutely does for some people. ETFs, index funds are best for people who do not have the time or the desire to select quality, dividend paying stocks individually. That’s one way to go. Secondly, they don’t have the knowledge to select individual stocks. And that’s why I created the 12 rules of simply investing; to make it easy for some people with a checklist. But if you don’t have that list, then you don’t know what the 12 rules are and you’re just going to randomly buy a stock based on the stock price today so you shouldn’t do that. If you don’t have any desire to learn how to do that, then you’re better off buying an index fund or an ETF. And, if you don’t have the patience, confidence or risk tolerance sometimes it freaks people out to buy individual stocks and then watch the prices go up and down. They say, “Oh, I can’t believe it. I’m losing so much money…” In that respect, I think an index fund or ETF is going to be better. It’s certainly going to be better than putting your money in a savings account or a GIC for the next 20 years. There I think it makes sense.

Tom: Or in some of the mutual funds. When I first started investing, I thought I was pretty smart as a financial analyst just out of college. I thought, “I’m going to buy this mutual fund (where it’s maybe at 2 percent) and I’m going to buy another one and another one and get all diversified. In the end, there’s so much overlap. And I was paying these huge management fees for very little value. So if someone’s in mutual funds, I think there’s definitely a good case to move over to ETFs as soon as possible.

Kanwal: Yeah, absolutely. And I agree with you 100 percent. If you if someone’s in mutual funds, move over to index funds or ETF. The MER is going to be a lot lower. The other point I want to mention with index and ETFs, the MER is certainly a lot lower. I was looking at a couple of them last week. MERs are .03 percent or point .06 percent, which is really good. If you’re only investing $5,000, $10,000 or even $100,000, the fees are insignificant. But when you get into the numbers—into the half million dollar range or higher or closer to a million dollars, an MER in any of the index funds or ETFs is still a lot of money and it’s going to come back and hurt you in the long run. But again, that’s for people who have a large portfolio like $500,000, $800,000 or a million dollars. That’s when those fees actually start negatively affecting your performance.

Tom: Yeah, the real dollars start to really add up and it doesn’t just seem like a small percentage anymore.

Kanwal: Yeah.

Tom: The other thing I wanted to cover is, to reduce risk we always hear about adding bonds. Where do bonds play in with you?

Kanwal: Great question, Tom. It’s an awesome question. For somebody who is right now in their 20s—what I always tell everybody is you’ve got to start as young as possible. I got my kids started when they were nine. So both of them (my son and daughter) took my course. They understand the 12 rules and they each have their own stock portfolio. My son started when he was nine and when my daughter turned nine she wanted to copy her big brother so we did the same thing with her. The younger you can start, the better off you’re going to be. In the case of my kids or in the case of someone who is still in their 20s, if you’re going to follow the 12 rules and build yourself a core portfolio of safe, reliable, dividend paying stocks, there is no need for bonds, ever. I know that goes against what they teach everybody in school; the older you get, the more you should put money in bonds and less in dividends. Can I give you a quick example of why I believe that to be true?

Tom: For sure.

Kanwal: Back in 2000, I bought 185 shares in TC Energy. The share price is $13.40. My total investment was $2,479. That’s not a lot. The dividend at the time was 80 cents a share. The dividend today is $3.24 a share. So if you take the dividend today, divided by what I bought this stock at, today I am now earning 24 percent return on my investment which was $2,479. Every single year, 24 percent of that comes back to me in cash in the form of dividends just from this one stock. That’s incredible. Can I get 24 percent return anywhere? From bonds, GICs… from anything? I can’t. The stock has gone up to like $60, $79 or whatever but I have no interest in selling that stock because it is returning to me 24 percent every single year. In fact, next year it’s going to be more than 24 percent because they’re going to increase the dividend again. I don’t know, but I have a high degree of confidence they will because they’ve been increasing dividends every for the last 20 years since I bought the stock. So to me, this becomes kind of like a bond. And here’s the other reason why. Remember, I invested $2,479. Guess how much I’ve gotten back in dividends since then?

Tom: Much more than that.

Kanwal: I’m a money nerd. I mean, I track all this stuff. I’ve tracked it out to the penny. Since then, from this one company alone, I’ve received $6,134.60 in dividends alone. This is better than a bond. My capital has been returned. It’s guaranteed that I’m not going to lose any money. The stock could go down to $2 tomorrow and I would not lose any money on the stock. So the goal is if you start when you’re super young, somewhere in your 20s, by the time you get to your 40s and 50s, you will be sitting on stocks that are returning you double digits. And they have paid for themselves in the form of dividends. So there is no need for bonds. If you haven’t done any of this stuff and you’re now in your 40s, then you will need to get bonds. Then you’ve got to follow the norm of 20 percent bonds or 80 percent stocks. You’re going to have to do that unless you can catch up. You’re going to have to invest tons of money in your 40s and 50s to catch up. But if you don’t have that and you don’t have the salary coming in, then you will have to put a portion of it in bonds and GICs.

Tom: It seems like bonds can probably help with some of that sleep at night as well. Even if you did start early, mathematically, it doesn’t make sense. Nobody wants to see their investments get cut in half over a market drop. I get the math doesn’t work. And I think you’re the same as me where we focus on real numbers a lot. But there’s probably people there that would want the bonds just for that feeling it gives you.

Kanwal: Yeah, it gives you the comfort factor. Yes, absolutely.

Tom: As you get older. I certainly don’t think anyone that’s too young should worry about bonds. But I could see turning some of that into bonds over time. The other thing I wanted to ask you is this idea of dollar cost averaging. Is this something you recommend or is it very tactical? Are we just sort of sitting on cash and waiting for the right purchase?

Kanwal: Yes. The big question I get is exactly the question you’re asking about dividend reinvestment plans. People ask if they should just sign up for a drip. And for those of your listeners who don’t know what a drip is, it’s basically when the dividends come in, instead of you receiving the dividends, the company is going to reinvest into their own shares and you’re just going to get more shares instead of getting the cash. Again, this might not go with all your audience because they might find it controversial but I don’t do drips and I don’t recommend drips. And the reason for that is simple; if I’ve bought a stock, let’s say it was undervalued at $50. And today the stock is trading at $100; I don’t want to be dripping that stock because the stock is now overvalued. Remember the 12 rules… I only want to buy stocks when they’re undervalued. When you drip you’re inadvertently buying shares that are overvalued. What I do (which might not be for everybody) is collect the dividends as they come in. And when I’ve got a substantial amount, I’m then going to go and apply the 12 rules and see which company satisfies the 12 rules today, and then invest in that company. I am investing over time. Absolutely. In the course of a year, three or four times a year I’m going to go out and buy the stocks, but I’m not going to drip them. Or in the case of ETFs or index funds, it’s every month, right? Regardless of what the market is doing, you want to put in money every month just because it’s simpler. It’s easier. It saves you time. For most people, that might be okay. If that’s your temperament and you don’t have time and effort, it’s automatic. It’s just comes out of your bank account every month and goes into your ETF and index funds. That’s fine. I’m the opposite. I’m not going to be able to sleep at night knowing that the Dow Jones is at 30,000 points and it’s overvalued and I’m buying stocks. I don’t want to be doing that.

Tom: And I should point out too, if using a broker, you can have the money go in automatically but it can just go to cash. You’re still putting that money aside and waiting until you’re actually taking a look at it and deciding how you want to spend that.

Kanwal: Absolutely. That’s a great idea. The one last thing I’m going to mention is imagine a week ago. This whole thing started last Monday so let’s go back a week and a half. Say you invested $1,000 into an index fund or an ETF a week and a half ago. Well, everything’s dropped now, right? The market was overvalued. We’ve had an 11 year bull run. We were breaking records every single year up until a week and a half ago. The market was going higher and higher. Remember, buy low and sell high. You don’t want to buy high. Even in stocks. Overvalued stocks a week and a half ago, you’re going to see big drops in your portfolio, today.

Tom: Well, this has been great. Hopefully, it’s going to calm some people down and give them some ideas on how they can take advantage of this without putting themselves in any kind of real risk. If they’re following those steps, they can find some great deals right now when these things go down. I like to think of it as like a flyer sale. You’re being told this thing is now 20 percent off so you can get in there and buy that. And it makes a lot more sense at that point.

Kanwal: And the dividend yields are going to be higher. The dividend yields today are much higher than they were a week and a half ago.

Tom: Exactly. That’s a good way to lock that in and feel even a little more confident. Can you let people know about your course and where they can find you online?

Kanwal: Sure. My website is I’ve got the course there. It’s very simple. I wasn’t kidding when I mentioned that my 9-year-old took the course. They did take. I want to make things simple and very easy to understand. There’s no jargon. There’s no difficult terminology. You don’t need a degree. You don’t need an MBA to take the course. So it’s very simple. I made it very easy for you to understand. There’s 27 videos and modules that are broken up so you’ve got as much time to take the course as you need. You can pause things. You can come back and review it. It also comes with the workbook and an Excel spreadsheet. We talk about how to figure out when a stock is undervalued. We show you exactly step-by-step how to do that using the Excel spreadsheet. And for people who don’t have the time to take the course or don’t want to take the course but just want to know what to buy, I launched the Simply Investing Report two years ago. What I do in the report is track over 225 stocks in the U.S. and Canada every month and I tell you exactly which ones pass the 12 rules and which ones fail the 12 rules. That way you know which stocks to focus on and which ones to avoid and which ones are undervalued today and which ones are overvalued. I do that every month.

Tom: Great. Thanks for being on the show.

Kanwal: Yeah. Thanks Tom.

Thanks, Kanwal, for your advice on managing the current market volatility and for sharing your 12 rules for dividend value investors. You can find the show notes for this episode at For those interested in Kanwal’s Simply Investing course or his newsletter, he’s offering Maple Money Show listeners a discount of 15 percent on both. Head to or Enter the coupon code, maplemoney15. And, of course, you can find all these details in the show notes at Don’t forget to tune in next week when Martin Dasko comes back to the show to discuss airbnb experiences.

Johnson & Johnson, they’ve had 56 years of consistent dividend increases…think of all of the stuff that’s happened in the last 56 years; recessions, 2008, 9/11, all these things, yet companies like these have continued to increase their dividend year after year, after year. - Kanwal Sarai Click to Tweet