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

Are you new to investing? Maybe you have a couple of mutual funds from your bank or haven’t started at all? Then stay turned to this week’s episode as John Robertson will take us through how to get started and make the most of your money. John is a great source for those looking to get started with investing. He’s the blogger behind, [email protected] and wrote the book, The Value of Simple. He created a course by the same name.

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Now, let’s talk investing with John…

Tom: Hi John, thanks for joining us today.

John: Thanks for having me on.

Tom: I know you have a site and a course focused on investing but I wanted to go right to the beginning. If I were a beginner investor, what’s the first step I need to take to actually get into this whole investing thing?

John: Well, it depends on whether you want to take a good first step or just the most essential first step. The most essential step is to buy an investment. But, before you do that you’ve got to create an account. And before you do that you really should create a plan because a plan is going to help guide everything and help get you through those rough patches in the market that are inevitably going to come up and help remind you why you’re investing. Investing feels awesome when the market is going up and your investment’s doing better but when markets crash and you’re losing money it feels really bad. It makes you wonder why you’re doing this, why you’re doing this dumb thing where you’re losing money. That’s when you go back to your plan—to help set you straight. Step one really is planning.

Tom: What does that look like? When I first starting investing I just hopped into a mutual fund. My idea of planning back then was just to look at past results and that one looked good so that’s what I ended up going with.

John: That’s what I kind of hinted at before. That’s the essential step. That gets you there but it’s not the ideal way to start. Planning is really thinking about (in broad strokes) what are you saving for? Why are you doing this? To help remind you of why you are doing this in the first place, and also giving you an idea of what risk is. Investing is going to involve risk. We can’t escape that and it’s really a disservice not to address it upfront. Are you comfortable with money being locked up for a period of time? Because you don’t want to be investing money you’re going to need next month for groceries. This is where the plan is going to come in. Is this money for retirement? Is it for your car to be replaced in five to ten years? Or is it for groceries or rent next month? That’s where the plan is really going to help identify the first element of your risk tolerance—how long do you have before you need this money again? Different investments are going to have risks coming in on different time scales.

Tom: Let’s talk about those types of investments then. What can people invest in beyond just mutual funds and how does that affect the risk?

John: There are different ways of getting these different kinds of investments. But, under the hood, you’re going to have stocks and bonds and things like cash or cash equivalents such as savings accounts, basically. The stocks part is going to be more risky in the short-term compared to the bond part. The bond part is generally more safe especially when you’re talking about government bonds where you have some sort of guarantee you’re going to get a given range of return— some interest payment the bond’s going to pay and a maturity date for when you’re going to get your money back from the individual bond. You bundle a whole bunch of those up together into a mutual fund or ETF. The stocks are going to be more risky in the short-term because the stock market goes up and down as people are willing to pay more or less for each of the stocks. Then again, you’ll bundle a whole bunch of stocks together under the hood of whatever thing you’re actually going to go out and purchase whether that be ETFs, mutual funds, et cetera, but those stocks can go up and down in the short-term. In the long-term, those are actually your better bet for beating other kinds of risks like inflation. If you need to support yourself in retirement 30 years from now, you’ll want to have some stocks. But, if you want to pay for a car in five years you’ll probably don’t want too much money in stocks.

Tom: Yes, I think everybody thinks they can handle that risk until we see the stiffs we’ve had a few times in the recent past. That’s when you really start to see what you can handle.

John: Yeah, it’s very easy to think you can handle the risks because, on a chart, the risks look very simple. It goes down and it goes back up. Generally, you’re investing after some long period of the market having gone up, especially if you look over the very long-term like 30, 40, 50 years. The market goes up… there are dips but it does go back up. But a dip on a chart that might look like a couple of years, this little blip on the chart— but a couple of years is a long time to live through in real time.

Tom: Yeah, especially with really bad time. I was lucky enough to get in and out of things just as the dips were about to happen. Not from any type of “trying to time the market” or anything. One time I took money out for a home buyer’s plan. That was back in 2008 so the market still went down quite a bit. That’s what got me out of the mutual funds. I get that someone may not necessarily want to take that risk. They might think they do but they won’t when it actually happens. You mentioned things like stocks and bonds. A question I’ve been asked lately is what’s my opinion on investing in Bitcoin? I’d also lump gold into that. More of the alternative kind of stuff compared to the straight numbers we’re talking about?

John: We can have opinions on all of these things but I don’t think it’s necessary to have an opinion on this sort of stuff. I mean, I have one and I can talk about it— But really, if you’re a beginning investor who’s just trying to get your money to work for you to work towards retirement, there’s a reason we call these, alternative investments. It’s because they’re alternatives to the mainline investments of stocks and bonds. As long as you’re globally diversified with your stock and you have a good mix of stocks and bonds, that’s going to carry you over the finish line at retirement. You don’t need to make it any more complex. I don’t think they’re really necessary. If you want to do some research on them, go ahead, but I don’t talk about them very much in what I do. And I don’t really believe they’re necessary.

Tom: I totally agree. You just kind of alluded to how to make your portfolio. What would you say the simplest way to do that is? You mentioned ETFs before, are those what you’d recommend or are there other options that are pretty decent?

John: There are a couple of good options out there. We haven’t mentioned fees at all yet so you want to be minimizing your fees as much as possible within your capacity to still maintain your plan because ETFs are the cheapest way to invest. Lots of people love them, especially financial bloggers like you and me, because they are super cheap and super diversified. You can go out and buy a couple of ETFs and have this really diversified portfolio with really cheap fees which is one measure of success. And, because we’re really into this stuff, ETFs don’t faze us at all. They’re not al dente. But if you’re a new investor you might find a brokerage account and ETFs a little bit more cumbersome to deal with. In which case, some other options might include mutual funds that include stocks and bonds including—in my opinion, is either Robo-Advisor which will do all of the purchases of ETFs for your or Tangerine’s All-in-one Mutual Funds where it’s one thing you’ve got to go and buy. And Tangerine makes it super easy because you don’t even have to buy the mutual fund. It works almost exactly the same as sorting money into your savings accounts. You just put the money into your account and they buy the mutual funds for you and then you have your money invested. It can be just that simple. Of course, that’s going to cost a little bit more than doing it yourself with ETFs.

Tom: Yeah, I’m mostly ETFs right now. I have considered going to Robo-Advisors though. I know there’s an extra fee. But, just like a lot of things in my life, if I can get it off my plate, it allows me to do something else with my time. Originally, things like rebalancing and all that was kind of exciting but has gotten less exciting over the years. For now, yes, I’m still in ETFs. Before that I had the TD E-series. I remember it being a hard way to sign up but once you got them it was a pretty simple way to invest.

John: That’s a perfect summary of the TD E-series. They’re a bit of a pain to sign up for. They make you jump through a lot of hoops and do some non-intuitive things to get it going in the first place but once you have it you can automate a lot of things, and it runs really easily. They are the cheapest mutual funds available with a small amount of money to put in. They’re a great alternative to ETFs and a lot of people recommend them.

Tom: Speaking of signing up… Going the other direction back to the Robo-Advisors, you can sign up in a couple of minutes, I think. And even on your cell phone too (I believe). We talked a little bit about risk. Maybe you can go a little bit into how people’s own psychology can mess with them? One thing I’ve talked about often is the confirmation bias, if you want to go into that, or anything else around the psychology of investing. Because, the reason I’m pro ETF more than the fees is, if you’re just investing in stocks, people can get in their own way a lot. Just going all-in on one stock and freaking out when it drops. So, if you want to touch on the psychology of investing a bit?

John: That’s a big part to being successful in the long-term. You talk about “getting in your own way” that’s very easy to do if you try to make your portfolio too complicated. If you say, “Instead of just buying one all-in-one market fund, I’m going to break it up into its 12 constituent components and tweak each of the asset allocations in my own special formula to get my own special return…” then finding yourself saying, “Ahh! What was I thinking?” It becomes really complicated to manage and you get into (what I like to call) execution risk. You’re not adding extra market risk but you’re adding the risk that you’re going to screw something up in trying to rebalance and manage and make your purchases when you make your stuff too complex. And, it’s very easy because in a lot of other aspects of life and in other consumer purchases having more complicated things, more options, is the better way to go. It sounds awesome and makes it more prestigious. It makes our technology do more things. It has more options, more bells and whistles. In investing, you don’t really want all those bells and whistles because it just opens up more room for you to make a mistake. Just try to get in and stay for the long-term and save as much as you can. Those are the things that make you successful. Not all of the extra little hoops and complications you try to put into it. In fact, those will make you more likely to get into “your own way” and sometimes make unintended mistakes that could cost you perhaps more than the money you would have made if you took a less complicated strategy.

Tom: Speaking of getting in “your own way,” another one I’ve heard before is people that are interested in day-trading. They want to go in and out of different stocks, literally every day. I know there’s lots of success stories and everything like that but I assume that’s probably not a good way for anyone to go?

John: Yeah, coming back to your comment about confirmation, day trading can be very dangerous if you try it and you’re not good at it for the first couple of weeks. Because you think, “Okay, I’m good at it” but then you have a bad couple of weeks and you say, “But, I was good at it before and now I just have this one little… but I’ll fix it and I’ll be good at it again and I’ll make all kinds of money.” Then it just ends up in disaster because day trading is extremely hard. It sound good on the upside because the upside is you make a whole bunch more than a buy-and-hold investor because you’re getting all of this extra return every single day. The downside is that you can lose that much more return every single day. Lots of day traders do end up underperforming the market or even going completely bust if they’re bad at it and don’t get out of it in time. Some people can pull it off but for most people, especially if you’re a novice investor who is just trying to figure out some way to get your money invested to move toward retirement, you don’t need to get into day trading. It’s kind of dangerous to even try.

Tom: I don’t like comparing investing to gambling but when you describe that, it sounded like someone that does well in a casino for half a night and in the other half of the night they lose it all.

John: Comparing investing to gambling is something that happens a lot because some people think it’s a good bet. And that turns some people off because they’ll think investing is really just gambling because there’s uncertainties and probabilities and math. So, because investing and gambling do share some of the same probability-based math and returns of that nature and uncertainty, it can turn people off from investing. Long-term investing is really not the same as gambling because you expect over the long-term that your investments are going to grow and you’re going to come out ahead. Whereas, with gambling, you expect that if you keep at it long enough the house is going to win, not you. Day trading comes closer to gambling than long-term investing does.

Tom: If someone is a beginner investor something that can throw them off is where to invest tax-shelter wise. They know they can invest in an RRSP. They know about TFSAs. Maybe putting it in none of that. Then again, some people might think an RRSP is an actual investment itself—

John: I’m going down to the bank to mind my RRSPs.

Tom: Yeah, yeah, exactly. Can you go into your thoughts on which one is best and where people should be investing?

John: Yes. They both have their pros and cons and they’re very complimentary to each other, TFSAs and RRSPs. Then you have other options like RESPs (Registered Education Savings Plans) for those with kids. You can save towards their education and get a government grant. Then the definition by exclusion being the non-registered account which is your taxable account. So, if you’ve used up all of your tax-favoured space, your TFSAs, your RRSPs or RESPs, then you end up investing by default in a taxable account where you’ll have to deal with all of those taxes. I love TFSAs because they’re very simple. You put money in, it grows tax-free and you take it out tax-free. RRSPs are a little bit more complicated because you put pre-tax money in. That means you put money in that hasn’t been taxed yet. Or, because most of us get a paycheck that has already had tax taken off, you put money in that’s had tax taken off and you get a tax refund. You can put that in too. Then the money grows tax-free. When you withdrawal, the withdrawals are taxed. There might be a difference at the rate you’re putting the money in, in terms of the tax-rate you’re hitting versus when you’re taking it out (the tax-rate you might be at) your overall income level drops between when you’re working and contributing and retired and pulling money out of the RRSP. Of course, sometimes it can go the other way. I have a very simple rule of thumb which is to put the money in your TFSA first because the RRSP tends to work out better for people who are in higher income brackets—which generally means they have more money to invest in the first place so they’ll fill that TSFA anyway and it will be somewhat meaningless—although not totally meaningless but a smaller portion of their overall investments compared to their RRSPs will fill the TFSA then move into their RRSP. Those in lower income levels, probably the TFSA is going to be better for them anyway so they’ll start working to fill the TFSA and just barely fill that as part of their retirement planning and that’ll be it. That’s just a general quick rule of thumb if you need somewhere to start from. And I think it’s a pretty good one. Not always. You’ve got to personalize it yourself. You’ve got to go through your own plan and maybe work it out with a planner as to what’s best for you in your situation. You can’t go too wrong with TFSA first.

Tom: You’re right, if you’re a beginner investor, most of the time you’re probably also going to be lower income because you’re young, just starting out.

John: It’s also reversible because TFSAs are flexible. You can take money out tax-free and you get the contribution room back the following calendar year. So, you start out investing everything into your TFSA because you’re just getting started… “I’m going to invest. I’m going to do it in my TFSA. I’m going to figure out my detailed plan,” and a couple of years later you finally figure out the detailed plan and decide the RRSP is better for your situation so you take the money out of the TFSA and start moving it into the RRSP at that point. Whereas, if you start the other way around by putting the money into the RRSP first, you can’t take it out to put in the TFSA without some tax consequences.

Tom: Exactly, yeah. Just a little side note… what are your thoughts on peer-to-peer lending? The only one I know of here in Canada is Lending Loop where you can invest in a business directly as a loan. What are your thought on that and where do you see it going in the future?

John: I’ve been impressed at how well they have been doing. I was extremely skeptical when they first came out. I was sure they were going to blow up because you don’t go to a peer-to-peer lender to try to get a loan unless you’re either able to get a much better interest rate from people that are crowd-funding this than you could get from a bank, and the interest rates did not look particularly good for the borrower because they were offering decent returns for people investing. So I believed they had to be a bad credit risk and this was going to be terrible but so far it’s been okay. But we also haven’t had a full economic cycle since peer-to-peer lending was invented. Most of these came out after 2008, 2009. When the next recession comes, I don’t know how those loans are going to perform. And that’s something that people need to think about. I also don’t know how much insight you can really get into the lenders that you’re providing those loans to because you’re doing active investing. This isn’t like peer-to-peer lending that you’re just adding to your portfolio so I would caution people to keep those in mind—that there may be some risks there that are unknowable at this point. Maybe they’ll continue to do fine forever, I don’t know.

Tom: I like that because, just like in 2008, 2009, businesses fail during recessions like that. When they have that loan for a new truck or to renovate their restaurant none of it is going to matter if the business falls apart.

John: Yeah.

Tom: I’ve liked it so far. The reason I brought it up is because I put a small amount of money in and almost a year later it’s 18 percent before their fees. So that makes it about 16 and a half percent which surprised me. I was pretty happy with that. Right now everybody is paying their debt so it’s been good for me.

John: But again, if someone’s paying 18 percent—you can get credit cards for that and even less in some cases.

Tom: That’s a good point, yeah.

John: So who is getting that loan at that rate?

Tom: That’s because some of them are rated—off the top of my head, I think an E-rating might give you 23 percent or something like that.

John: I’ve been ringing that bell for about six years now and I’m wrong, so—I’ll admit that I’ve been very cautious on this and I seem to be overly paranoid about it but—

Tom: I was surprised too. I put a little in just to try out the service and now I’m considering maybe doing some more. Just to bring it back to the beginning, if someone’s decided they want to invest, what should they do? You mentioned Tangerine if they wanted that one fund. You mentioned TD as well but what if they just want to buy the ETFs or go with a robo-advisor? Do you have a few companies you can shout out where people might be able to look?

John: There are a ton of robo-advisors. You can go to the autoinvest.ca calculator that’s now run by Kyle Prevost and Justin Bouchard (the guys behind Young and Thrifty) that will help to compare the different options for you. Things like Nestwealth have a flat-fee so that works out better for people who have lots of money to invest whereas Justwealth and Wealthsimple and Wealthbar… I could list a whole bunch of others because there are nine or ten of them now. And, RBC is coming out with one soon that looks kind of exciting too. There are tons of options out there. It’s tough to really pick a winner especially when there’s so much other stuff hanging around them that can help differentiate them as to which one may or may not be better for you. Signing up with those is quite easy. If you want to buy ETFs, then a brokerage account is what you need because ETFs are sold over the stock exchange and you need a brokerage account to get access to that. The one that is consistently recommended by people such as myself and other bloggers is Questrade because they offer nearly free-to-buy ETFs. There are other ones that offer free-to-buy ETFs and even free-to-buy-and-sell ETFs but there’s usually some sort of restriction on there. Either you have to buy in multiples of 100 shares—

Tom: Oh, yeah.

John: I think the case at National Bank where they offered a limited menu of ETFs that are on their free-to-buy menu which is the case at Scotia iTrade.

Tom: Okay.

John: In other words, you’ve got to pay commissions.

Tom: I’m a fan of Questrade as well. I’ve actually got all four of those accounts we were talking about; the RRSP, TSFA, RESP and the none-registered. I mentioned this in a past episode already, I did move over there from TD-eSeries once they started doing the note commission on ETFs. That made the decision a lot easier. The last time I saw you we were doing karaoke. When you’re not in a karaoke bar, where can people find you online?

John: I’ve got a blog. It’s called, [email protected]. It’s been running for a long time and covers a lot of topics. Most of the last 10 years or so of material has really been focused on personal finance and investing. I have a book called, The Value of Simple and it is a step-by-step guide on how to get started with investing from setting up your account to making trades to how to track things for taxes and how to decide between your TFSA or RRSP and to come up with a really simple sort of three-page plan that will help keep you on track. After I wrote the book I got a whole bunch of questions from people about how to invest and do this in more depth and in more media than just the book. They want to hear my voice and see videos so I put together an online course you can take at your own pace. You can find it at course.valueofsimple.ca and the book is at valueofsimple.ca.

Tom: Great. Thanks for coming on the show.

John: Yes, thanks for having me on, Tom.

Thanks to John Robertson for the pointers for new investors. You can find show notes for this episode at maplemoney.com/johnrobertson. The Maple Money Show is still new and I’d love your help in growing the audience so more people can get weekly ideas on how to make, save, invest and spend money. Can you do me a huge favour and share maplemoney.com/show with a friend of family member who wants to improve their finances? Thanks. I look forward to having you back next week.