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A Crash Course On Passive Investing For Beginners
Everything you need to know to start building your portfolio
I have one mission with this publication; help you use money to live your best life.
The primary means by which I deliver education on personal finance is through my written articles, which are delivered to your inbox every Monday and Friday.
But I am excited to let you know I’ll continue to expand into other mediums like video and audio.
This is the second video-based course I’ve released through MOAM. The first was a Retirement 101 course available here.
This course will give you the “101” on index investing. If you want to learn even more, consider picking up a copy of my book, The Rational Investor, which paid subscribers can read for free here.
Section 1: Why Index Funds?
The ABCs of ETFs
Why I don’t pick stocks
Why I don’t pay someone else to pick stocks for me
Section 2: How to lose money as an index investor
Why market timing does not work
Why I am not worried about stock market crashes
Don't force yourself to sell at a loss
Section 3: Diversifying a DIY index portfolio
Diversifying between stocks and bonds
The role bonds play in your portfolio
What's the right mix of stocks & bonds?
Section 4: What I look for when buying index ETFs
Popular index ETFs
Let me be clear; I am not licensed to give recommendations on specific stocks or investment funds. None of the funds listed below are a recommendation to invest in them. That being said, I am happy to provide you a list of some of the most popular index funds that DIY investors use to build their portfolios.
Any fund included on the list does not imply an endorsement of the fund, and I have no affiliation with any of these fund companies. This is simply a resource to get you pointed in the right direction..
The ticker name for each fund will appear in brackets.
U.S stock market index funds
Vanguard S&P 500 index fund (VOO).
Vanguard Total stock market index fund (VTI).
iShares S&P 500 index fund (IVV).
iShares total stock market index fund (ITOT).
International stock market index funds
Vanguard total international stock fund (VXUS).
Vanguard FTSE Developed Markets fund (VEA).
Vanguard emerging markets fund (VWO).
iShares core MSCI total international stock fund (IXUS).
iShares core MSCI developed markets international stock fund (IXUS).
iShares core MSCI emerging markets stock fund (IDEV).
U.S bond market index funds
International bond market index funds
Section 5: Building a DIY index portfolio
Key considerations when building an ETF portfolio
To build your portfolio of ETFs requires you to select the right ETFs to achieve your desired allocation to stocks and bonds as well as your allocation between domestic and international investments.
For example, let’s say a U.S. DIY investor wants to build a portfolio that is 50% bonds and 50% stocks. For simple math, let’s also assume they want a 50–50 split between domestic and international stocks and bonds.
The investor would need to select ETFs that satisfy the following requirements
25% of the total portfolio in U.S stock index funds.
25% of the total portfolio in international stock index funds.
25% of the total portfolio in U.S bond index funds.
25% of the total portfolio in international bond index funds.
The more complex the portfolio, the more work is involved in building and maintaining the portfolio. Don’t forget; you’ll also need to rebalance your portfolio on occasion if you want to maintain your desired allocations.
Don’t forget if this sounds too intimidating; you can always choose a robo-advisor, which can help you with the construction and rebalancing of a portfolio of index ETFs.
Is it possible to properly diversify by investing in only one or two ETFs?
Yes, it is absolutely possible to build a diversified portfolio using two or even one ETF.
To build a diversified portfolio using two ETFs, you could simply invest in an ETF that tracks the global stock market and an ETF that tracks the global bond market.
An example of a globally diversified stock ETF would be Vanguard’s total world stock ETF (VT).
An example of a globally diversified bond ETF would be Vanguard’s total world bond ETF (BNDW)
(Again, mention of specific funds is not an endorsement of that fund)
It’s also possible to invest in a single ETF that provides you with a ready-made diversified portfolio.
For example, Vanguard’s balanced index fund (VBINX) provides you a one ETF portfolio that invests in 60% stocks and 40% bonds. There are different “one fund solutions” for more or less aggressive asset allocations.
When you are just getting started with investing, it’s important to embrace simplicity. That is why I like the idea of one or two ETF portfolios. The fewer decisions you have to make, the more successful you are likely to be as an investor.
How to buy ETFs
Once you have gotten to the point where you know what ETFs you need to buy to construct your portfolio, you need to know how to actually input the trade through your online broker.
Let’s quickly review some of the basic terminologies you’ll need to know to execute a trade and buy an ETF.
This is the type of thing that is best understood using an example. Below is a screenshot of me recently buying 100 units of a Canadian stock market index fund through my online broker.
At the top of the image, where the large red arrow is pointing to the left, is where you enter the name of the ETF you wish to purchase. In this example, I was buying “VCN.TO” (not an endorsement of this particular fund), which is an ETF that tracks the entire Canadian stock market.
Once I have selected VCN.TO, I am presented with some terminology that shows what price investors are currently willing to buy and sell the ETF I selected.
Let’s review each term and what they mean.
Last: this shows the current market price the ETF is listed for. In this example, VCN.TO was listed at $25.87 per unit.
Bid: this shows the current price investors who want to buy this ETF are willing to pay for it. In this example, investors interested in buying VCN.TO were willing to pay $25.83 per unit.
Ask: this shows the current price investors who want to sell this ETF are willing to sell it for. In this example, investors interested in selling VCN.TO were willing to sell for $25.88 per unit.
This information is useful when I fill out the details of my order, which are below the bid-ask prices.
Let’s review the information I inputted to finalize the purchase of the ETF.
Quantity: This is where you enter the number of units you wish to purchase. This will be determined by how much money you have and the current bid price of the ETF you wish to purchase.
Order type: There are a number of different ways you can structure your order. The default in my online broker is a “limit order.” A limit order specifies the highest price you are willing to pay for the ETF you wish to purchase.
Limit price: Since I selected “limit order,” then this is where I entered the maximum price I was willing to pay for the ETF. Personally, I enter the bid price as the limit price. Why would I be willing to pay more than other investors for this ETF? However, do your research and enter whatever limit price you are comfortable with.
Duration: The order duration allows you to control how long you want your order to remain active. The default choice for my online broker “Day,” which means the order will expire if not executed by the end of the trading day.
Account: If you have multiple accounts, it’s important to make sure you are buying the ETF in the right account. If I wanted to buy this ETF in my TFSA (A TFSA is the Canadian equivalent of a ROTH IRA), I would select TFSA under the account option.
Once I had all the information filled incorrectly, I hit “buy” to send in my order for the 100 units of that particular index fund.
You don't need to be rich to start investing
I hope you enjoyed this crash course on passive investing.
If you are eager to continue learning, pick up a copy of my book, The Rational Investor.
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