The Potato is Back in Town

There are many books, guides, blogs, text messages, and ancient manuscripts written on the fundamentals of DIY Investing, while there is considerably less information circulating about “who” should consider building their own DIY portfolio. So we decided to tackle this head on. Consider it our contribution to the financial conversation in Canada.

Now, we couldn’t tackle a topic this broad without enlisting our most distinguished Because Money Podcast guest, and author John Robertson, PHD. John’s most recent book “The Value of Simple” is a financial guide that aims to take the complexity out of personal finance, and according to many excellent reviews, it has done just that! Go ahead, watch the episode, check out the resource list below and follow along with the transcript if you like. Enjoy!

Transcript

Jackson: Jackson Middleton

Kyle: Kyle Prevost

Sandi: Sandi Martin

John: John Robertson

Jackson: Hey everybody, welcome back to another episode of the Because Money Podcast. This is Season Two, and today we will be talking about DIY. That stands for “Do-It-Yourself” investing.

And we’ve got a guest. We’ve got the “Holiest of Potatoes”, John Robertson, and this episode is subtitled, The Potato is Back in Town. John has actually joined us three times—count ’em, three times—on the Because Money Podcast, in the past, so he is a very distinguished guest. You can find him in Episode 8, which was called Borrowing Money Isn’t Your Sacred Right As A Canadian; Episode 14, Why You—Yes You—Should Care About How Financial Advice Is Regulated; and he joined us in Episode 23, Anonymous Advice and the Value of Simple, which was at the time the book he was writing. Now he is an author, mathematician, PhD, all-around good guy, father, husband, and four-time Because Money guest.

Sandi’s going to kick off the show and talk about everything, and we’re going to go from there. And I guess I should introduce Kyle there as well, who didn’t get the memo to wear a cardigan sweater. But that’s okay. We scheduled all of us and we’re all here. He didn’t get the cardigan sweater memo; Sandi didn’t either. But hey, here we go. Sandi, on to you.

Sandi: Well hello. I really like getting thrown to by Jackson, out of the blue. [laughs]

So this week’s episode, we’re talking about who should be a DIY investor. So very often you’ll run into—this is kind of along the “just” theme that we’ve been talking about a lot this season—you’ll run into a lot of people on Reddit who are really well-meaning, along the lines of that anonymous advice piece that we did with John not too long ago. And they’ll say, “Well you should ‘just’ DIY. Don’t pay high mutual fund fees. Do pick your own stocks, but do it yourself. You should just be your own portfolio manager”.

And so today I thought we could have a really great discussion about who actually should be their own portfolio manager. Kyle, what did you think when we started talking this?

Kyle: My response was, “If you can do grade 10 math, you should be a DIY investor”. I teach personal finance to grade 11 students, and by the end, I am reasonably certain if they took one of the options that John—for example—has presented in his book, maybe not the most complicated of the options, but one of the lower maintenance DIY options, they could easily be DIY investors with about 10 minutes a month of effort. They’d have to do a little reading before that, but yeah, I’m pretty confident that almost any Canadian with a grade 10 math education could be a DIY investor.

Sandi: You said “could”, but should they? Okay, so let’s let me ask you this then: Are there people that just obviously shouldn’t? And I don’t mean that as insulting, but is there a certain type of person or a certain type of profile that you think, “Hmm, no I don’t think you should”.

Kyle: I’m so biased in this. I don’t like the idea of handing money over to somebody else to do it for me. There’s some interesting stuff about robo-advisors, that maybe we can talk about another day. But I think if we’re talking about stock-picking, that’s another, that’s a totally different discussion for me. But if we’re talking about do-it-yourself investing where you are just establishing a very basic plan for your funds and your goals, I think again, I would like to see 80 to 90% of Canadians as do-it-yourself investors, and think that they should be.

I realize that’s not really a near-term goal, but I would like to see it. One, because I’d get a lot more traffic to my website, but two, because Canadians would have a lot more wealth.

John: If I can just jump in and bore people for a moment, Kyle mentioned some numbers. I’d like to just start with a couple numbers. I did a tiny bit of background research before coming on here.

So first off, about 25% of Canadians have some kind of self-directed account out there; however, only half of those are actually do-it-yourself investors. Most of them—or half of them—have that self-directed account, but still use the services of an advisor to help them manage their investments, or they open the account and ended up not using it.

About 33% of Canadians in a survey that’s now a couple years old wanted to invest on their own, but didn’t have the knowledge or confidence to get started.

So somewhere around one-half to two-thirds of Canadians look like they want to get into do-it-yourself investing or have already started. And most of those have not yet started. So there’s a big, big portion of the population that could be do-it-yourself investors, that might want to be do-it-yourself investors, but are facing barriers right now.

And I think a large number of that sort of thirds to two-thirds number could be do-it-yourself investors. I’m not sure if we’d get to 90-some percent, but I’m thinking the majority of Canadians could be good do-it-yourself investors, both from the grade 10 math point of view of the limiting factors of what they’re just able to do, as well as the behavioural factors of should they be doing it.

There’s still not going to be everyone. So now I’m going back to your point, Sandi, about who should be doing it, we can talk about that a little bit more.

Sandi: Well actually, your statistics made me think of another “-ould” question. So maybe the people who would be do-it-yourselfers can help us narrow down who should be. The people who opened the accounts and actually didn’t actually follow up, we could say after a certain point in time, maybe you shouldn’t be the one doing it. Because what happens with the next thing you have to do? So you have to open up the account. You have to decide how you’re going to fund it. You’ve got to have a plan, like the a very simple Investment Policy Statement in John’s book: “I’m investing like this because of this.” I love that sheet of paper in there.

But if people haven’t actually taken the first step to fund the account and they haven’t taken that second step to plan, does that mean that we should winnow them out and say actually maybe the evidence that you have not done it yet means you shouldn’t do it in the future. Question?

Kyle: No. [laughs] I think there’s some middle ground in there that could be possible for some people that are just really not confident in their ability to process investments. For example, Robb Engen, who some of you listen to this show might be familiar with, has kind of neat sort of half-way service. And Robb can explain this much better, I’m sure, than I can. But essentially, he will help you, give you the tools and sort of walk you through how to start a do-it-yourself portfolio.

So you have an experienced person there who’s experienced on many different platforms and can sort of explain things to you, but you are actually doing the majority of the work yourself. And then assumedly, you eventually will no longer need Robb, I’m sure would be his pitch, that you will be able to take what he’s telling you and make it work for yourself. And there’s varying degrees of help out there if you do need a little help getting started.

But I really think that we cross too many people out saying, “Oh, behaviour. You’re no good. You can’t do it yourself” or “You’re no good with paperwork. You’re just gonna take way too long to get all this stuff down”. We should be encouraging those people to do-it-yourself and then maybe the do-it-yourself stream would get a lot more press, would get a lot more resources directed at it than it does right now, which is almost none.

Jackson: The question would be, why is do-it-yourself not as popular as it could be? When I hear “do-it-yourself”, I initially think stock-picking. Like you even kind of said, okay, I’m not necessarily an advocate for stock-picking, but that’s what I think. It’s kind of like, “Okay trade freedom, here I come. I’m going to start to do trades. I’m buying the individual stocks”. I mean, that’s when I got on and blew all my money.

I mean, is there this kind of fear out there that DIY investing is stock-picking and it’s “risky”, whereas, you know, it actually is from stock-picking to a Couch Potato strategy and everything in and around there.

Sandi: Well, actually we have layers of meaning here. So when we see “should you be or could you be a DIY investor”, I think at its most basic you could say a DIY investor is anybody that does the trades themselves. Whether it’s a Couch Potato model or they pursue a momentum or a value or a dividend strategy, or they pick their own stocks from—I don’t know—a newsletter that they get from someone in 1998. Whatever that strategy is, anybody that executes their own trades is theoretically a DIY investor.

I mean, you could probably make a good argument for not being a DIY investor in some of those categories, but I don’t think what we’re talking about today is the actual investment strategy. So let’s maybe narrow down that umbrella.

Kyle: I was just going to say before we actually narrow the umbrella down, and John is an advocate of this in his book, he actually—if you use some of his strategies—don’t actually have to make any trades at all. And you can still be a do-it-yourself investor if you look at some of the Tangerine options, and now some of the robo-advisor options that have come out. You actually don’t have to initiate any trades, and I would still consider that a do-it-yourself investor. But I don’t know, John, what would you describe that as, or place that option in the do-it-yourself continuum?

John: Yeah, I was going to say, do-it-yourself is not completely black and white, so are these options out there that help you manage it. You’re paying a little bit more than you would with the bare-bones making ETF trades at a discount brokerage all on your own, but you’re still going to be saving a lot of the fees and getting a lot of the benefit of being a do-it-yourself investor versus going with some kind of an advisor who is mostly in a sales role versus an advisor role.

And then you can go and pay for advice from someone like these Robb, from someone like Sandi, from all these different advisors. And to pitch my own site, I recently created a directory of fee-only advisors, so you can go and find some of those people.

So you don’t have to do everything on your own. If you need help with the complex parts of the plan, you can go and get someone to help you. And then the day-to-day management is not that much more difficult than managing a chequebook these days. And these days is an important addendum there, because the field of investing and do-it-yourself investing has evolved so much over the years. Well, there are prejudices against that, you know, our parents may have had from 20-30 years ago are not there anymore. Brokerage accounts are very easy to set up and use online these days.

And then on top of that, they have these platforms—robo-advisors, or things like Tangerine. Even the mutual funds are not that hard to use. You just move some money around. It’s not much harder than paying a bill, which everyone can kind of manage these days. The bigger issue is the fear that’s built up over centuries of our civilization over here, thinking that investing is something that only professionals should be doing. But we’ve gotten over that for some other things, too. I mean, there are parts where professional advice is valuable and comes into play, but we got over having professionals pump our gas, and now we all pump our own gas at self-serve stations, and we even pay for pumping our own gas ourselves with the pay-at-the-pump stuff. Some people get confused by the credit cards or just don’t manage their credit cards very well, and some people still have to go in and pay in cash, but most people can handle that sort of thing.

And it’s just in-part making the system easier to use, which the system is starting to do now that those are coming out. And in part, people just learning that it’s not so scary and that they can handle it. And that they get the education to do it. The educational component is skill kind of lacking; it’s not institutionalized. I’m going to plug my own stuff. I’ve done The Value of Simple to help investors learn how to do this on their own. There aren’t a whole lot of other options. There are a few seminars. There are people you can go to, but aside from the lucky students in Manitoba who get it in Kyle’s class, this isn’t a thing that’s taught standardized across the country, in class. People have to pick it up from their family or learn it on their own.

Sandi: See, isn’t this funny, because I actually do not lump robo-advisors and a Tangerine—let’s say any cheap all-in-one fund—as do-it-yourself investing. Somebody else is buying the securities for you. In robo-advising, somebody is—at NestWealth—somebody else is rebalancing for you. Wealthsimple, somebody else is rebalancing for you, helping you choose your asset allocation.

You call them and say, “I have $10,000” and then you talk about your goals and your investment profile and how that needs to fit into your plan. Which they don’t do your financial plan, obviously, but if you give them the context, they invest it for you.

I don’t think that’s DIY. I think it’s a really good alternative for people who believe in DIY, who want to have lower costs, who believe in a systematic kind of investing where over time the decisions are mostly made in advance, before emotional things happen. I believe all of those things are useful with the robo platform, but I don’t believe that’s DIY.

So there you go; we’ve come to the point where we’re defining terms, so let me ask the question again: Kyle – just for the sake of our argument, let’s pretend that DIY investing only involves having a Questrade account with three ETFs in it – should everyone have that kind of account?

Kyle: Then, no. If you hold me to that definition, I will scale back a little bit. And I think again, to use John’s book and John’s writing as an example, he very vividly illustrates exactly what characteristics will separate good DIYers from not-so-good DIYers. Do you want to save that extra 0.5% to 1% on your investments, which can be quite substantial? For many Canadians that would be tens of thousands of dollars, if not more, over the course of their investing lives. Are you willing to do a little bit of reading—just a little bit, maybe 4-5 hours tops, I would say—in order to get that?

And some people aren’t. Some people are like “No, that 4-5 hours of reading about financial stuff is not worth that long-term money to me”. And that’s the opportunity cost that they’re willing to bear.

So if we’re talking about percentages of the Canadian public that want to do that, I would say somewhere maybe between 30 and 50%. I guess it depends on every individual. And it also depends on if provinces get out there and accept really good proposals for personal finance curriculums that some people might be putting out there.

Sandi: Nudge, nudge. [laughs] So are there people, John, you have a DIY investor service kind of similar to what Kyle was talking about with Robb, helping people answer their questions about “okay now what button do I push for this kind of brokerage account?”, or “what do I answer for these forms?” Would you say—obviously not telling tales out of school, really—but have you encountered people that contact you for help setting it up and the end result is you try to convince them not to DIY?

John: There have been a few cases of that, yes. In one particular case, someone had a tough time controlling themselves when it came to the financial media. A hot story would come out about a hot stock and he would have to go out and get it. He couldn’t limit himself to the index view of it. He needed to feel that control, in which case it more sense to go with a—in his case—a fee-for-service broker, full-service broker, who then he could call up and say, “Hey I heard this great thing”, and then his broker could talk him out of it. [laughs] Then that broker followed an active strategy for him.

Some other people, they have a little bit of difficulty with just that extra little bit of math. I know it’s not complicated math, but you need to get the direction right when you’re doing rounding, for instance. And they said, “That’s just too much for me. I don’t need that extra quarter point. Straw on the camel’s back and that was it for them.

Other people have no problem managing the trades, but then they needed to hire an accountant or a bookkeeper to help them with the reporting of taxes, because adjusted cost base was just not something that they wanted to deal with. But finding an advisor that does that for you anyway is kind of difficult. So kind of no matter whether you’re going with an advisor or on your own, you often need to hire an accountant to do your taxes if you’re not comfortable with the tax part. So that’s kind of neither here nor there. They were still managing the investment part of it just fine.

And some people have found alternate ways of making it work. I suggest using spreadsheets because I was born and raised on a computer and love Excel and spreadsheets, but not everyone does. It’s sort of a means to an end though, if you want to rebalance, or your balancing spreadsheet. If you know spreadsheets well, it will help you do it really quickly. For some people, the spreadsheet is an impediment because they’re not familiar with the spreadsheets. It adds some more unfamiliarity and technology to it to make things go wrong.

But we’re balancing, again, this grade 10 math. It’s not all that hard, so they pull out an envelope and then just kind of scribble on the back and they get their rebalancing calculations, and then they’re ready to go. People will find things that work for them, but they’re not for everyone. But mutual funds are not much harder.

Sandi: So Kyle, would you say then—I’ll put you on the spot. Off the top of your head, could you think of three characteristics of somebody that you would say, “Yeah, you should do this”.

Kyle: Yeah, okay. Off the top of my head, I think someone who isn’t afraid to do 4-5 hours of reading. And you don’t even need that much time to understand it. It’s more 4-5 hours to actually just build up your confidence, to read a few different authors, to read a little bit of the background behind it. So you read John’s book. I know Sandi puts out a lot of stuff on this. I’ve written a free ebook you can you can download on our site.

So, just a few different people to just sort of buttress your belief in this sort of a thing. And again, I’m talking about do-it-yourself from a three ETF portfolio perspective. We can touch on stocks in a second here.

The second thing would be the ability to understand grade 10 math, which isn’t as common as it sounds. You need to understand basic fractions, decimals, and percentages in order to just be confident with what you’re doing. Again, you don’t actually have to understand this to use that strategy; it’s that simple. But in order to be confident that what you’re doing makes sense, because there’s no advisor sitting there telling you, “This is the way to go. It’s a five-star fund. You can rest easy. Your nest egg is growing and you don’t even have to think about it”. You have no one doing that, so you have to provide that self-talk for yourself.

And the third one would be someone who’s not afraid to ask for help. Basically, the idea that you have to be confident enough to ask for help. And I call it, “the Canadian Emperor has no clothes” frame of mind. We’re all so certain that everyone knows about money besides me, that I’m never ever going to admit that I don’t know. And you have to admit you don’t know if there’s not something. When it came to calculating the adjusted cost basis of certain ETFs, I had to admit at one point, I actually don’t know how to do this. I thought I did and then I started down the road, realized I didn’t.

Fortunately I’ve done all my investing in tax-advantaged accounts, so it’s not a huge deal for me. But a few years ago I had to admit that I did not actually know how to do that. So those would be my three characteristics.

Sandi: John do you have others that you would add?

John: Yes. I would add the ability to stick to a plan and to keep a long-term perspective, because there will be times when the market is kind of volatile. It’s looks like we’re in a little bit of that right now. I know I’ve had a couple people emailing me, going “Oh, I’ve just started investing and it’s down 5% or 10%” and you need to be able to ride out these difficult times and keep a long-term perspective. And if not, then you need to have the resources to call on somebody or set it up yourself if you’re a do-it-yourself investor.

You know, it’s great to go to an echo chamber like Reddit Personal Finance or Canadian Money Forum, or some of the blogs. They’ll just keep telling you, over and over, reassuring, “It’s okay. This is what happens. It’s a long-term thing. It’ll work out. Market volatility is very normal”. You know, lots of blog posts and articles out there, you can just print those out and read them over and over until you’re through it. As long as you set up a system for yourself; whether that’s someone else or setting yourself up for success, that’s going to be great.

And also, how you handle difficulties is going to be important, because it’s difficult to realize that you often want to control things, but the market isn’t controllable. And so, if you can’t come to grips with the fact that you will never be able to fully avoid a downturn in your lifetime, then you might not be well-suited for DIY. If you’re the kind of person who will panic and sell out at the bottom, and unfortunately, sometimes difficult to say that in advance, until you’ve gone through it. Which is why it’s great to try to be a DIY investor as soon as possible. Because the sooner you get that experience, then it’s not going to hurt you as much.

Kyle: Yeah, that’s been a new realization for me, John. Sorry, you faded out on me. I didn’t mean to interrupt you. I just was going to say that’s been a new realization for me, as well, because when we first started preaching index investing and sort of went online and started blogging, we’ve basically been in a bull market since then, since came online about 2010.

So all these people were like, “Yeah, you guys are making a lot of sense with this ETFs index investing. It’s the way to go. You’ve got me convinced”, and they started doing good things. They’ve built up really nice portfolios. And in the last year—the Canadian portion, especially their portfolios—in the last couple years have taken a bit of a beating. And they’re coming at me now being like, “Oh well, we were going to buy a house with that money”. I’m like, “Where did you get the idea to be investing in the stock market when you wanted to buy a house? Like where did I ever advocate for that or what sort of thinking led you to that?” And they’re like, “No, listen. This investment is down 12%”, whatever index they’re tracking, is down, “I don’t like it anymore”. And it’s like, “Well, what happened? I thought you read my book. That was sections 3, 4, and 5 of the index investor commandments there”. So it does seem that logic works really well when the market keeps going up, and when the market goes down, we tend to forget that there was this logic in place, and that we knew somewhere in the back of my head that the market would eventually go down.

Sandi: Do you know, I think one of the things that would be a good characteristic of somebody who should DIY, is somebody who isn’t going into it for out-performance reasons. So out-performance to me, for kind of a three ETF or Couch Potato portfolio, out-performance is a potential by-product, given what we think about how the markets work, reversion to the mean over the long-term, and that sort of thing.

But really, this is a very simple investing solution, and the reason I advocate for it is that it’s a disciplined, decisions-in-advance approach. It’s not because we think it’s going to blow every other strategy out of the water. And if out-performance is the reason people are going into DIY, because they looked at the index numbers over the past four years—obviously at the beginning of this year and not now—that may have been a good indicator that potentially this isn’t the right strategy for them.

Because I think that’s also an indicator of somebody who might also switch strategies next month, when things go bad.

Kyle: You know who I’ve have great success convincing and sticking with do-it-yourself? And now they’re preaching it? Engineers. And perhaps that’s the spreadsheet commandments there, that John was talking about. But engineers look at it logically and they are convinced by the data, and they’re like, “Great, I got my sheet here. I’m good to go for the next 30 years”, and they never look back. They don’t question anything. They’re like, “No, I’ve read the data. I’m good”.

Sandi: That’s fantastic. So tell us, you wanted to make some comments about stock investing, about DIY stock investing.

John: Just before you do that, can I just jump in with three things that I don’t think DIY investors need to be, even though people might think that you don’t need to be genius. That’s the first thing. People think, “Oh, I need to be so smart to understand the markets”. No, you don’t need to be a genius and you don’t need an in-depth understanding of the markets. Like you can do this reading a couple of books. The market’s going to do its thing behind the scenes. You don’t need to know all the cogs and workings there.

Just like you don’t need to know how your engine works and how the emission control system works, and how if you’re driving a hybrid car, the trade-off between electric and gas operations works, just try. No. All you need to know are a couple of controls that really matter: the steering wheel, the gas, the brake; your money going in, your asset allocation, your rebalancing, etc.

And you don’t need a license. I’ve had a lot of people come up to me—over the last year, in particular—and say, “We’ll I’m interested in this, but I don’t have a license. What do I need to go and get to be able to trade for myself?” I’m like, “You don’t need anything. You just need to create your account and log in”. Someone needs a license to sell things to you, but you don’t need a license to buy these things.

So there, three things.

Kyle: Yeah, absolutely.

Jackson: Kyle, I’m going to jump in. Kyle, before you start picking stocks for us and telling us which investments we should go with.

Kyle: Sure, sure. [laughs]

Jackson: Okay, we’ve talked about the heavy kind of stuff—what it is and what it isn’t. Who is this for? Let’s actually nail down demographics. If we’ve got any viewers that are watching this and they might still be thinking, “Hey, this isn’t me.” What about the 16-year-old kid with his first job and he’s looking to invest.

Kyle: Perfect.

Jackson: What about the 60-year-old woman who’s retired? Like is this something that is suitable for all demographics, or is there a minimum amount of money that you have to have before you can become a DIY investor? Address some of the actual particulars. Who should invest for themselves?

John: Bear in mind, in terms of demographics, because it’s all about whether they’re able to stick to the plan. That’s why we’re focussing so much on behaviour and understanding, and that sort of thing. You can start with very little money. You can open an account at Tangerine for $100. A TDE series, you need more like $500ish to be able to get a decent allocation between the four different funds that you’ll need. And I recommend about $5,000 before you start looking at ETFs or something like QuestTrade. Not very much money in the absolute scheme of things. Maybe a lot of money to an 18-year-old, but really not a lot of money when you’re starting to save.

And you don’t need to have it all piled up on a big pile. You don’t need to wait until you hit $40K-$50K before you start. You can start as soon as you’ve got that first $100 or $1,000 in your savings account that you don’t need for near-term emergency fund; or, as Kyle was mentioning, like a downpayment for something that’s in the near-term.

As soon as you’ve got money that you know you can keep in the long-term, you can start investing. And the sooner you start, the better because then when the market crash eventually comes along, if it comes along soon enough, well you don’t have very much money in there. You think, “Oh, that’s all of my money, but it’s not really going to hurt me”. And then you can build up that callous to market volatility that you’re going to need down the road. Young or old, it doesn’t matter.

Sandi: Yeah. That’s the thing, Jackson, I don’t think it’s an actual demographic. I don’t think we could nail it down in the way that we like to in personal finance, and say if you’re between $5,000 and $50,000, you should do x, y, and z. It’s much more about somebody’s actual characteristics as a person. So I think the difficult this is that iit’s very easy for us to look at somebody and the way that they already behave with their investments and say no you shouldn’t be doing that. You obviously have the characteristics of somebody who should not be a DIY investor.

But it is very difficult – ahead of time, before somebody opens their brokerage account – to look at something else, or to tell someone in advance that they should do it. To give somebody practical advice and say, “You know how to budget. You have controlled the way that you spent your money and you’ve aligned it”, (and of course I’m going to talk about budgeting.) But that, to me, might be a good characteristic. Somebody who takes the time to dig into the minutiae of how they spend, and uses some kind of system in a way that allows that to tick along over time and get them to their goals, might be the kind of person with the mindset that could be successful at DIY. But that person might be 64 and almost retired, or 82 and already retired, or they may be 16 with their first job, or 25 with four kids already. I don’t think you can nail it down by demographic. The end. [laughs]

Kyle: What these guys said. I know 16-year-olds. I’ll tell you a quick story, Jackson. He was 16 last year, and in my personal finance course. He went into the bank, told his mom he had $1,000 saved from his job at the bakery. He wanted to do this retirement long-term thing because he saw what compound interest could do. And he’s kind of his own thinker, this guy.

He goes into the bank and his mom decides to go in with him, seeing how he’s a minor. They go in, see her friend at a major bank that I won’t slander here. [laughs] They sit down with an advisor and she says pretty much what everyone here does when they go into any big bank in Canada, “Yes, we have some excellent retirement savings options for you here, sir, within a TFSA, an RRSP”. Oh, I guess not a TFSA in his case, seeing how he’s not 18 yet, “But we have some excellent retirement options here for you. Here’s the mutual fund we’re recommending this year. It’s a really great deal”, etc. etc.

And he says to her, “Okay, what indexed funds do you have?” And she actually didn’t know what an index fund was, at the time. So he said, “Well, is it a lower fee?” So she had to type it I and look at her computer, and then she said, “No, it’s not”. And eventually, long story short, he brings the information back to me. I want to say that it wasn’t because she was intentionally misleading him, but just an honest error. But she actually had compared the results of an international ETF index fund to a US-based mutual fund. And so she hadn’t compared apples-to-apples, and had sort of misled him as far as both fees and performance.

So he decided, “To heck with it. I’m going to do my own index thing”. This doesn’t look like too much paperwork and he will be a do-it-yourself investor now. So he was a 16-year-old. I don’t think he would describe himself as a math genius by any means. He’s probably a middling math student. He just seems to understand. He’s a little bit stubborn; has a little hint of stubbornness to him. Just enough, and he might take after his teacher in that regard, and he’s convinced now that banks make very hefty profits selling products to guys like him, and I don’t think he’s wrong.

Sandi: I don’t think he’s wrong either. Actually, if I could chime on the bank experience, I don’t think that that was an unusual case at all. Actually, I would bet a lot of money—if I bet on things in general things—I would bet that she had no idea what the difference was, at all. I don’t think she was misleading him. She didn’t even know what an index fund was.

Kyle: I agree, yeah. Yeah, so we’ll talk a little bit about picking stocks just before we wrap up the show. If we’re talking about DIY picking stocks, I would say less than 1% of the population in Canada should look at picking stocks. And perhaps Jackson can talk about why that’s the case maybe a little bit more.

If you’re going to pick stocks in Canada, here’s what I tell my students. If you’re going to pick stocks, think about who’s on the other end of most trades in the Canadian and American stock markets. I can’t speak for Europe. I haven’t read up much on theirs, but I would assume it’s very similar. Think about who’s on the other end of that trade. The majority of the time it’s a major fund, a huge fund, or it’s a professional with access to insider information and super computer with an algorithm; or someone who has went to business school, has an MBA and understands how to read business documents probably far better than most retail investors.

So just realized that’s who’s on the other end of most trades. So if you’re going to try and beat that person, you had better be willing to do what they’re willing to do, and put that much analysis into your stocks.

Sandi: Oh, Kyle, that wonderful. That’s fantastic. I like that a lot. Actually, so I would say—it came to me as I was listening to you and basking in the wisdom of what you had to say.

Kyle: That makes one of you today. [laughs]

Sandi: [laughs] Someone who doesn’t think they’re that special, probably would do well as a DIY investor, in kind of the ETF portfolio that we’re talking about. If you think that “I’m probably not all that special. I’m probably not going to blow it out of the water. I just kind of want to plod along. I’m persistent. I’ve shown myself to  be able to stick to things, stick to a plan and be slightly less emotional about money,” then you can be a great DIY investor. Agreed?

Kyle: Yeah, 8-10% is great. If that’s what you’re aiming for in the equity part of your portfolio, I think you’re awesome. If you look at what 8-10% compounded looks like, and maybe some would say I’m being a little ambitious in that forecast, but I don’t think it’s totally crazy looking at an equities portfolio. Seven, Sandi says 7, use 7.

Sandi: Six, I said 6.

Kyle: Six. Six for an equities portfolio? Oh, Sandi’s very cautious.

Kyle: I don’t know if you look at what compounding does with a number like that, I don’t think you need to be a superstar, personally. I can reach my sort of middle-class goals just fine on that number.

Sandi: [laughs] Yeah, me too. That’s fantastic. John, do you have anything else you want to add?

John: Well yeah, if we’re talking about active investing and trying to get those numbers, it is also very easy to plug into some of those compound growth calculators, something like Warren Buffett’s record of 20%, and then go, “Ooh, yeah!” [laughs]

Jackson: Nice, I like.

John: But it’s very difficult to be Warren Buffett. The reason he is so famous is because of how excellent his record was. Also because he dispenses really excellent gems of wisdom, but because of how fantastic that record was. Just off the charts. Like that is unrealistic for someone to expect to be able to get by doing active investing on their own.

You know, we’re talking fractions of fractions of a percent of the population. You need to honestly assess yourself if you are in that area. And the real issue is that just like with drivers, lots of people think they’re well above-average and they’re really not necessarily so much. So that can be a big issue. That further depletes the pool of people who should be active investors. The ones who are most likely to think that yes they should be, probably shouldn’t be because they’re not assessing their abilities honestly. [Kyle laughs]

And it’s not just you need to be emotional and analytical if you’re trying to be an active investor, you also have to be very independent-thinking, because the market’s price things that are well-known and well-accepted, and very quickly and very stringently. I love Prem Watsa, he gave a great talk at Ivy a couple years ago that I love to quote, or approximately quote, if I may.

He talks about how almost everything in human endeavours works really well if you take the average of what a bunch of experts say. So if you take bridge that you want to build or oil refinery, and you get ten engineers to give you a plan for a bridge. Ten engineers to give you a plan for an oil refinery. Take the average oil refinery. Take the average bridge. Take the average highway bed development, the average skyscraper load-bearing pillar thickness that they decide on; you’re going to come up pretty well, pretty decent bridge, pretty decent refinery, pretty decent building.

If you take the agreement consensus of 10 people who are doing active investing, the number’s almost certainly wrong because it’s including everything that they think they know and then something comes up that surprises them and the price deviates wildly. And so you have to be the person that understands what that surprise is going to be that the 10 other people didn’t catch. And it’s very difficult to be that independent, because you know, humans are social, somewhat herding animals and we don’t like to be the person that has these incredibly varied independent views. We like to have people agree with us, and if you’re going to be someone who’s picking individual stocks, then you need to be able to separate yourself really far from the herd and what everyone else is thinking. That’s very difficult both from the analysis side and the emotional behavioural side.

Whereas index investing is a lot easier because you just pick up on what all these people are doing. That’s where you manage to catch the average of what they’re doing, by averaging across all the stocks, not just the one stock where they’re coming to consensus. Because overall, that average is going to come up with all the growth that’s happening in the market as all those companies make profits.

Sandi: There you go. Jackson, anything to add yourself?

Jackson: No, I thought it was awesome. The only thing that Kyle was saying is—and that’s something I learned after my stock portfolio went, like 98% was just done in two weeks [Kyle laughs] was at the end of every trade that I made, I was buying aggressively, there was someone selling aggressively. And that person ended up being a lot smarter than me. So yeah, there you have it. I’m with all you guys. I like it. But that was a good show. I enjoyed it. Thanks everyone.

John: Thanks for having me on, guys.

Jackson: Thanks, John. Thanks for joining us. Good-bye.

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