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.
Investing myths are all around us. For example, we’re often told that investing in the stock market is difficult, and complicated. Or that when you retire, you need to eliminate all investment risk from your portfolio.
My guest this week, Joseph Hogue, helps to dispel many of the myths we are told about investing, and explains why investing in the stock market is much easier than most people think.
Joseph is an investment industry vet, having worked with venture capital and private wealth management firms. He’s now self-employed, and runs several personal finance websites, as well as a popular Youtube channel.
Joseph explains why the idea that you need to worry about a stock market crash is nothing more than a lie perpetuated by Wall Street. It’s what keeps people listening to the analysts on television, constantly trading in and out of stocks, and trying to beat the market.
What’s interesting is that historically, the average return of mainstream investors has been about 4%, while the market itself has performed closer to 10%.
Our conversation covers a range of investment topics, including the importance of participating in a company matched investment account.
As Joseph puts it, “no professional investor is ever going to be able to beat the returns you’ll get with a company matched or taxed advantaged account”. If you’re not taking advantage of your company match option, you’re missing out.
It wasn’t that long ago that in order to get a copy of your credit report, you had to fax in your request along with copies of your identification. This week’s sponsor, Borrowell, makes it easy, allowing you to access your credit score and report online, within minutes. To get a FREE copy of your credit report, visit Borrowell today!
- Three misconceptions that benefit the investment industry.
- Investing should not be about earning double digit returns.
- Investors goals should follow a goals-based strategy.
- The average investor underperforms the market.
- A company match on your investments is an immediate return.
- How you can survive a stock market crash.
- You don’t need to listen to stock market analysts, it’s not that complicated.
- The ‘core/satellite’ strategy explained.
Does investing in stocks sound too difficult? Do you think you need to follow the investment shows on TV or the latest stock tip online? Do you need to eliminate all investment risk when heading into retirement? Joseph Hogue joins us to dispel these investing myths and more showing us that investing in stocks can be a lot simpler than we might think.
Welcome to The Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. Today’s show is brought to you by Borrowell. Not too long ago I used to have to fax in a request to get my free credit report by mail once a year. Now I get my report and score for free online, saving me a lot of hassle. Get your free credit score at maplemoney.com/borrowell. Now, let’s chat with Joseph…
Tom: Hi Joseph, welcome to The Maple Money Show.
Joseph: Tom, great to be here. Thanks for having me.
Tom: I know you do a lot of YouTube videos around investing in the stock market. While you’re primarily talking about the American stock market, it really doesn’t make a difference. Canadians can invest in American stocks just like Americans can invest in Canadian stocks. What I’m hoping you can get us through is some of the myths or investing lies about the stock market.
Joseph: Sure. There are three misconceptions that are lies that are perpetrated by the industry. Whether you’re on Wall Street or in Toronto with the TSX, it really has to do with benefiting the industry and the people in the industry. We can go over these three misconception (or lies) but it really has a lot to do with the fact that investing has really become an entertainment industry. It started in the 90s when people found out they could get rich with internet stocks. Investing really became a mainstream game. You had these channels like CNBC pop up and all these other investing websites that really perpetrated these lies for the sole purpose of getting investors hooked on daily stock picking, analysis and worrying about a crash. I worked with venture capital in a private wealth management firm for more a little bit more than a decade and you see that they want you to believe that investing is about returns; those double-digit returns and picking the next hot stock. If investing is about returns then you’re going to be glued to the TV to find that next hot stock or to find those double-digit gains or even those triple-digit gains which is that mythical 10 meg that’s going to multiply your money. And that, along with a lot of these other lies lead to these horrible investing decisions. A researcher in Dalbar actually puts out a study every year on average investor returns. They just released their 2017 one and what it found is that the average investor annualized 4 percent over the last 10 years. So every year that’s about an average of about a 4 percent return. And that’s against the stock market return. Even including the 2008 crash, about 10 percent on stocks. That’s a huge gap of about 6 percent from what the market actually produces and what average investors are actually getting. It’s because a lot of these lies. They’re chasing stocks, trading in-and-out which, of course, runs up those fees. That’s really something that eats into returns and the only people that get rich off it are the people in the industry; the brokers who are collecting those fees every time you trade as well as the websites and the TV stations that are selling those billions in ad revenue from so many eyeballs being on that every day.
Tom: I’ve always been a big fan of ETF investing or any kind of indexing for that reason because if you’re constantly chasing that stock—I’ve never really watched those TV shows but I have to assume by the time they’re talking about them on TV, even if it’s a daily show, it’s already kind of too late, right?
Joseph: Sure, sure. You get people on there—and it breaks my heart because you see a lot of these very well respected hedge fund managers and professional investors like—for liability I won’t say his name but, he’s got a show on CNBC where he just leans on buttons that scream, buy, buy, buy and sell, sell, sell. And it’s just the wrong message to be sending to regular investors. That brings us to our first investing rule. What investing is really all about is just a goals-based strategy. So many people think investing is about that return-based strategy, about chasing stocks and getting those returns. Well, what are you investing for? You’re not investing just for the pure money of it. You’re not investing to see those digits run up in your investment account because it’s ultimately meaningless. You’re investing for what you’re going to use that money for. You’re investing for your goals. That’s really what people need to bring their investing back to—that goals-based strategy. And that starts with understanding what those goals are. One of the biggest problems with investors is that they have these vague goals like wanting a million dollars by the time they retire. Or they just want enough money so they don’t have to work anymore. That’s fine. But how motivating is that when budgeting gets tough and you can’t make that deposit in your investing account? The problem is the goal is so vague it just means nothing to you. What I tell everybody to do is to actually sit down with their partner, their spouse or whoever and actually create a mental picture around your goals. What does retirement look like for you? Where are you on it? What are you doing on a daily basis? Who are the people around you? Even down to the emotions and what you like to do—what retirement’s going to look like for you? It’s going to do two things, really. You’re creating this mental picture around your retirement or around your goals—any goals. It may be watching your son or daughter walk across the stage at their college graduation because you had that money to pay for that. That’s going to be so motivating. Whenever budgeting gets tough, whenever you’re thinking about not depositing in your investing account that month, you’re going to take out that mental picture and it’s going to motivate you to do what you need to do to keep investing and stick to your plan. Also, what it’s going to do is give you a concrete idea of what you’re actually going to need in retirement. It may be close to a million dollars or it may not. But it’s going to give you an exact dollar figure (around this mental picture) to be able to plan on the rest of your investing strategy. That’s really the first investing rule… it’s got to be based on a goals-based strategy.
Tom: Yeah, I like that idea instead of just some random number. Like you said, someone is getting 4 percent but the market does 10 percent? That math alone tells me average sounds pretty good. Just stick with the average on the market.
Joseph: I think that’s why a lot of these passive index investing—the Vanguard, the Bogle Heads investing has been so popular because getting that market return is actually beating the market if you consider the market is the mainstream investors.
Tom: And really, that’s less effort than trying to constantly watch these shows or get these newsletters and trying to constantly find the next “thing” of the day.
Joseph: Absolutely. The second Wall Street lie you hear is that you have to worry about a stock market crash. This one is everywhere especially at times like now when it appears that maybe the economy might be coming down a little bit and we might get some kind of a stock market selloff. Again, it just keeps people glued to the analysis. It gets people trading in and out of stocks and trying to beat the market. And what people see is that investing is so much more about what you put and getting the free money (that we’ll talk about) but if you look at a regular portfolio, if you put in monthly deposits and you’re making around a 7 percent annual return, it’s about 20 years before those earnings on that portfolio become equal to a “greater than” of what you put in. Over 20 years it’s basically a very nice return on a savings account. A lot of people start investing and want the double-digit returns but they’re disappointed when they make even 6, 7 or 8 percent returns. They’re wondering why they’re not making thousands of dollars on returns and that, obviously, leads to frustration and disappointment where they just stop investing. You have to remember; investing is just about what you put as it is on the returns you make.
Tom: When it comes to timing the market I’ve never sold based on timing. But I’ve been a bit guilty on trying to buy based on timing. I get the idea that a market crash or even just bad news for a company can be a sale but it’s still not bad to buy during them. Maybe there’s even further to go.
Joseph: Oh yeah, I’ve been there. Definitely. And it’s a big problem. It’s one of the reasons I suggest you never have more than 5 percent of your total wealth or your stock portfolio in a single company because everybody likes to talk about that “dollar cost” averaging where you buy a stock for $100 and then maybe it comes down to $80 or $70. You remember you liked it at $100 so you’ll love it at $80. That means your average cost would now be $90 so doesn’t have to come up quite as much. You can follow a stock all the way down and pretty soon you’ve got 40, 50, 60 percent or more of your money in that stock hoping, dreaming that it just comes back to even. It’s kind of a gamblers trap where you’re just trying to get even. I’ve seen a lot of portfolios wiped out by people chasing a stock all the way to the bottom and it never quite comes back.
Tom: And speaking of these investing myths, one I’ve heard a lot is that investing in stocks is like gambling. You mentioned the gambling and I guess it’s that “chasing the loss” where it does start to look a lot like gambling. But in general, people get this idea they’re not even going to start investing because it’s just gambling.
Joseph: It does have a lot to do with these misconceptions and lies (if you will) that the industry puts out on investing. In that respect, it is a lot like gambling where you’re trying to chase those big returns. But if you look at it as a goals-based strategy, a long-term strategy, investing in different assets and in a diversified portfolio like we’ll talk about, then it’s much more like a savings account with a very attractive return. Part of that savings account idea, part of that idea of getting everything you can out of it is getting that free money. We have retirement accounts like the Roth and IRA in the US and I understand you’ve got the RRSP and the TFSA there in Canada and they’re some of the best investing decisions you’ll ever make. It always amazed me when coworkers didn’t take advantage of the 401k plan with a company match or some of these other retirement accounts because anytime you can get a company match in your investments or get those tax benefits that is an immediate return on your money. And with the TFSA, a great return in the future. No professional investor is ever going to be able to beat the returns you only get with a company match or some of these tax advantage accounts.
Tom: I’m a big fan of RRSPs and TFSAs because, why pay the taxes if you don’t have to? One thing I often tell people without getting into their tax situation is if they put their money into an RRSP as an investment then they can get that tax refund, then take that tax refund and invest within a TSFA. So that way they’re getting a little bit of both, with basically free money.
Joseph: Yes, definitely. Obviously, everybody likes that immediate deduction. It’s the same way here in the States with the IRA and the Roth. But they don’t pass up the power of that tax-free retirement money. Even just having some in both is going to help you be flexible and manage your taxes in retirement. It can be an amazing tool. Besides the fact that—I would actually prefer to pay my taxes now and then get all my returns tax-free because in that RRSP you’re eventually paying taxes on those returns when you withdraw, right?
Joseph: Well, with a TFSA, if that money is tax-free on withdrawals then while you’re paying taxes on your contributions that’s never any taxes on your returns. In my book that’s so powerful.
Tom: And that’s where people are catching on too. The amount you can contribute is only $6,000 a year, right now. But, it’s been over a decade now so it’s starting to get to the point where if people are invested in the right thing and not just some low-interest savings account—not chasing stocks but at least being invested in stocks, they’re starting to see that TFSAs have some value in retirement.
Joseph: Do they have the conversion with an RRSP there? For example, here you can only contribute about $6,000 a year total, both combined. So you can give $3,000 to each or $6,000 to one. But, you can convert as much as you want out of that IRA into a Roth any given year. Basically, the idea is that you put all your contribution into the RRSP and then convert it into a TFSA whenever you want?
Tom: No, you can’t do that here because there’s no conversion. And, if you pull money out of an RRSP, you lose that contribution room and you’re taxed on it as soon as it’s taken.
Joseph: Oh, okay.
Tom: So the TFSA is great but they don’t let you double-dip that way. You pretty much have to make that decision upfront. One thing you can do is if you have a lower income—you’re just starting a career or something, you could be putting your money into a TFSA because the tax refund isn’t as helpful to you yet. But you can always pull money out of a TFSA and invest in RRSPs in the future just to get a better tax refund as your tax bracket goes up.
Joseph: I think that’s one of the benefits up there (in Canada) compared to the US options where they’re both locked up until you retire. You can’t take money out of your Roth or IRA until you are 59 ½ years old without penalty.
Tom: I use a portion of my TFSA as my emergency fund too because I can pull the money out if needed. At least it’s gaining. And hopefully I don’t need it. But, if I ever do it’s totally accessible. Let’s go to the next myth you have.
Joseph: The final lie here is that you have to listen to the analysts and play that stock market game. Obviously, there are benefits. Again, this benefits the industry because it is the one turning out all that analysis and giving those six-figure jobs to all the stock brokers. That idea of playing the stock market and beating the market when, in fact, that just perpetuates that cycle of the average investor getting about half of the actual market returns. Investing doesn’t have to be that complicated. It’s just a system of gradually adjusting your money over stock, bonds and real estate over decades. In fact, I have friends that basically look at their investing account maybe once every five or ten years, for all of about two or three hours. They deposit into the account every month and they’ve got it set up where their deposits are spread out over their portfolio so they’re constantly investing. But they’re not even worried about what stocks are doing or picking new stocks or anything like that. They’re in those broad-based ETF funds. And, every five or 10 years they’ll go back and re-imagine the goals they had—that mental picture, and make sure their portfolio of stocks, bonds and real estate are matching those goals as far as risk and they may make some adjustments. You start out as a 20-year-old, hopefully investing and you’re able to take on much more risk. You’re going to live through two, three or four market corrections or even stock market crashes and it really doesn’t matter because you’ve got the time to rebound with stocks. What happens is in your 30s, 40s and 50s your tolerance for those big market crashes or that money moving back and forth is limited. You’re going to need the money pretty soon. Maybe even some of your goals like that college education is becoming something that’s within the next few years. So the idea shifts from growing your money to protecting the money you’ve grown to have there when you need it. You gradually shift from that stock portfolio into stocks, bonds and real estate. It’s so important and something I think so many people put off. They might even understand the idea but they’ll go from their 20s to 30s or from their 30s to their 40s and think their goals really haven’t changed that much so they don’t need change their portfolio that much. They’ll just do it when they’re 50. Well, when 50 comes they put it off again and when 60 comes they put it off again and pretty soon it’s 2008 and they still have 80 or 90 percent of their money in stocks. It’s really a tragic story for millions of people that lost half their portfolio because they were getting to retire and that stock market crash just wiped them out.
Tom: Yeah, that makes sense. That’s when timing can be a problem if you’re not getting into something safer like bonds. At the same time though, I’ve seen people overly cautious. Let’s say they retire at 50 or 60 and go all bonds. Now they’ve kind of taken on a new risk which is their investments aren’t even going to keep up with inflation and they could be alive another 30 or 40 years. You’re right, it’s all about balance.
Joseph: Even someone moving into retirement, a lot of advisors will recommend they have at least 30 to 40 percent in stocks just to beat that inflation and so forth. A lot of times you’ll see recommendations on a purely stock, bond portfolio. I think if you divide some of that up into stocks, bonds and real estate— And of course, real estate doesn’t necessarily mean you have to invest directly in the properties but you can get some really great exposure through a real estate investment trust. You can invest in the US market—
Tom: No, we have the exact same thing too. It’s the exact same thing, REITS.
Joseph: Yeah. Basically, you get the same exposure to commercial real estate which is a great cash-flow investment with excellent dividend returns. So investing across stocks, bonds and real estate just gives you a little bit more of a diversification. Real estate tends to do a little bit better than bonds when interest rates are rising. It’s kind of a nice “in-between” for those returns of stocks and the safety of bonds. Even someone that’s getting ready to retire, maybe 30 to 40 percent in stocks and 30 percent in bonds and the rest in real estate—in those real estate investment trusts. That’s going to make sure you’ve got that protected cash there when you need it with the bonds, as well as having the growth you’re going to need for 30 or 40 years.
Tom: Exactly. Was there another rule you wanted to give us related to this?
Joseph: I guess it’s more of a bonus. If you want this goals-based investing strategy and you don’t want to worry about your money then you’re going to be mostly in those broader based funds, those ETFs, investing broadly across the market. So you make those market returns which, as we’ve seen, is actually really great. But say you wanted to nurse that excitement a little bit. You still want to pick stocks and you’re still thinking maybe you can beat the market by a little bit. What I like to use is called a core satellite strategy. Basically, let’s say you’ve got a core portion of your portfolio which is 60, 70 or 80 percent of your money. That is going to be in those broad-based funds; stock market fund, bond market fund and maybe a nice diversified real estate investment trust to give you good market exposure to those three assets. Then you take the other 20 percent (or remainder) of you money and that’s in the satellite portion of you fund. Think of this core as your planet of funds (that’s the most of your portfolio) and there are these satellites that kind of revolve around that. That can be in individual stocks. This does a couple of things, actually. You’ve got 20 percent of your money in these individual stocks so it’s a much more limited pool of money to invest. If a single, individual company crashes or doesn’t do well it’s not really going to hurt your portfolio too much. Each individual stock has maybe a few thousand dollars in it and its maybe two to five percent of that satellite portion so it’s really not going to hurt that whole portfolio. But it also keeps you from having to search so much for stocks. I see people that have their entire portfolio in stocks and they’re constantly looking for new stocks because they have so much money they have to invest. But, if you only have 20 percent of your total wealth in individual stocks then maybe you only have 10 names. Maybe you only have 10 or at the most maybe 15 companies that you’re investing in individually. It limits you to the best in breed stocks that you really care about and think will have potential.
Tom: For sure. I invest in a few stocks on the side, especially for dividends. But one thing I won’t touch is technology stocks because I just can’t keep tabs on them. A technology company can come and go so easily. Even the biggest ones. I just find it a lot easier to avoid that completely.
Joseph: It’s interesting you say that because one of the biggest misconceptions in stocks is something Peter Lynch said decades ago, actually. It’s “invest in what you know.” Everybody takes that to think, “Okay, well, I’m going to Walmart. What am I putting in my basket? I’m investing in Campbell’s Chunky Noodle soup because I like the soup.” Well, that’s not exactly what he meant. He meant to invest in what you have deep experience, deep professional knowledge in. If you work in the food packaging industry, then you have an intense and detailed understanding of how companies are competitive in that industry and you’ve got almost like insider information on which companies are going to be the best within that sector. It’s not quite enough to like chicken noodle soup to be investing in Campbell’s. You have to have that deep knowledge. I don’t invest in individual tech stocks because I am not a tech guy. I’ve never worked in technology and I really don’t understand what makes a company competitive. Within that I just invest in the sector fund—the technology sector fund.
Tom: That makes sense. Well, this has been great. Can you let everyone know where they can find you online? I know you’re in a lot of places just like I am so, go ahead.
Joseph: Sure. I’ve been blogging for a little over five years. I’ve got four websites all within the personal finance niche. I’ve got Peer Finance 101 which is my personal finance site. I’ve got peerloansonline.com which is more of a paying off debt site. Then I’ve got mystockmarketbasics.com which shares these rules on investing—the basics, really, and not so much the stock picking and how to beat the market. Then myworkfromhomemoney.com which kind of chronicles my experience over the last five years in building these online businesses. This last year what I’ve really been focusing on is a YouTube channel. It’s called, Let’s Talk Money. It’s on YouTube. In one year I’ve grown a community of a little over 47,000 people. It’s great, that feeling of face-to-face you get. I never got that kind of engagement with the blogs because you’re really right in front of people. It’s really a great feeling to be able to connect with people like that so I’d love to see people join the community. We talk about everything I talk about on the blog. It’s a one-stop-shop for beating debt, making more money and just making your money work for you.
Tom: Those have been great videos. Everyone should head over there and check you out on YouTube. And if you’re watching this on YouTube, even easier… we’ll put a link on the bottom. Thanks for being on the show.
Joseph: Awesome, I appreciate it. Thanks Tom.
Thanks Joseph for helping us set the record straight on the stock market lies. You can find the show notes for this episode at maplemoney.com/josephhogue. Check out all the episodes at maplemoney.com/show. Have you entered The Maple Money 10th Anniversary $1,000 Giveaway yet? If not, head over to maplemoney.com/giveaway and enter before the March 2 deadline. Thanks for listening to the show and I look forward to seeing you back here next week.