Why You Should Invest in ETF’s
Now I have more time to think about investments and the choices I have made. For those who are lucky enough to find a great financial advisor, keep with the program. For others who don’t or like more control, nothing compares to ETF’s. ETF’s or (Exchange Traded Funds) are in a nutshell a fund that buys a basket full of stocks (similar to a mutual fund) but charges much less than a mutual fund. They do this because they eliminate the broker and save the related fees in most cases. Mutual funds often charge 2-4% of the returns they make to the investor (you) while ETF funds often charge 1-1.5% of the returns.
Mutual Funds and ETF’s often end up buying the same (or similar) stocks so it puts more pressure on Mutual Funds to perform relative to ETF’s since the ETF’s start off with a 2% head start from savings on broker fees.
One key difference is that ETF’s normally require you to have a self-directed RRSP where you can make your own ETF (or other investment choices) by doing it yourself online through bmoinvestorline.com or other online banking choices. Once it is set up, everything is actually quite easy.
I first got on to ETF’s after doing some research on investing. I started with Warren Buffett books (I figured he knew a couple of things). Buffett has said that the person who influenced his investment approach the most was Benjamin Graham, whom Buffett worked for in his early years. Graham authored one of the best investment books of all time titled (the Intelligent Investor). In this book Graham summarizes that the average investor should invest in Exchange Traded Funds because they outperform Mutual Funds 95% of the time… that’s right, 95% of the time. For those who want to invest in specific stocks, he recommends that you better be prepared to invest a ton of time and energy. Being somewhat lazy, I decided to go with the low hanging fruit and I have been a happy ETF investor for years.
Great resources are www.ishares.ca, one of the largest ETF groups.
Time for Canadians to buy in Florida?
Lots of opinions on this topic and focus on when the market will bottom. Warren Buffett is the guru in this area and preaches the “time” not “timing” approach to making money. I think it is fairly common knowledge that the bottom has recently hit. I recently read where Buffett has invested in a hedge fund that focuses primarily in buying undervalued US properties in the Florida region.
Pictures are worth 1000 words….
- Over the last ten years after netting out the highs and subsequent corrections, the net gain was only 1%. Buying now is essentially 10 year old pricing
- In the 10 years before that the average return was 8%. Over the last twenty years the average annual return is 4%.
It is reasonable that growth going forward could be 6-8%
Another picture…..
Exchange Rates
What jumps off the page is the strength of the Canadian dollar relative to the US dollar over the past 20 years and how few number of years it is actually close to parity. It was just 10 years ago that a $400,000 house in Florida actually cost us $597,000 Canadian.
I think the chart indicates that over a longer time horizon the currency fluctuation is quite volatile and it is certainly likely that it will hit between .70 and .90 cents again at some point. That means a gain from currency on a $400,000 house of $171,428 and $44,444 respectively.
When you consider gains from both appreciation and currency I think it is a pretty good time to buy.
The Retirement Guy 