When we first started My University Money we weren’t sure exactly what we wanted to be in terms of who we were writing for. Obviously we wanted to help the everyday student (and we think we’ve done a pretty good job of that, take a look at our past articles), but we also wanted to introduce the basic concepts of investing for people who were a little more advanced in their personal finance studies. That led to our Investing Basics Series, as well as my free eBook about my favorite investing strategy today. In case you haven’t checked out the book yet I highly suggest taking a quick gander. I promise it isn’t written in banker’s speak and is quite easy to understand. The basic idea behind the book is that investing doesn’t have to be difficult. It doesn’t have to be this confusing place that is dominated by guys with way too much grease in their hair that have suits they can’t really afford. Investing can actually be quite simple.
Keep It Simple Stupid
The duo incentives of keeping investing simple, and getting the most bang for my investment dollar led me to Exchange Traded Funds or ETFs as they’re better known. ETFs are basically like a big basket of stocks. These days a lot of companies have started labeling products “ETFs” that are very confusing products, but there are only about a dozen that you really have to know about. The whole concept of the investing style I like (and it was invented decades before I was born so I’m not going to even pretend to have invented anything about it) is to easily spread your investing dollars out across as many companies as possible and then just close your eyes and wait for your nest egg to grow. They key to the whole thing is keeping your investment costs as low as possible. The free eBook I made details exactly how much money investors lose in various fees and commissions without ever realizing it. For many people its tens of thousands of dollars over the course of their lifetime, and it can be much higher than that. ETFs have minimized many of the fees, but the costs to purchase and/or sell the investments could still take a substantial bite out of your investment returns.
Questrade Is #1
That leads us to the rather awesome announcement last week from Questrade – our preferred discount brokerage. I talk about Questrade in the eBook, but if you’re crunched for time they are basically the cheapest option on the market (in Canada), they present all the major investing options you will need, and their customer service has been great for us (although for full disclosure we should admit that we have seen some people have a few minor difficulties with the company when they were trying to execute more sophisticated investing strategies). Anyway, our #1 choice for setting up a lost-cost basic investing portfolio recently announced that they would now be allowing people to purchase ETFs without paying any commission at all (which is a massive improvement on their already industry-leading low rate of $5 per transaction). What this basically means is that building a well-balanced portfolio through buying ETFs just got a whole lot cheaper. That savings means more money in your investment account, and that translates to a whole lot more money when you go to pull it out at 55-100+ years of age!
Before I talk about why this is such a big deal for the average investing Joe and not just finance geeks like yours truly, there are a few caveats that go along with this promise. Here are the conditions from Questrade’s announcement:
And like I said, there is a bit of fine print:
- You’ll pay the ETF commission at the time of purchase, but we’ll rebate you in two business days
- There are no minimum number of shares you have to buy. Hold them for as long as you’d like
- Buying ETFs for free is only available if you’re trading on one of the Questrade IQ platforms
- ECN fees or any other incidentals charged by the markets are your responsibility
- Your standard commissions will apply when you sell an ETF
Since I only plan to add to my investment account for the next 25 years or so I’m not overly worried about selling my ETFs, and the ECN fees are almost negligible (a few cents per transaction in most cases). The rest sounds good to me!
The Nail In Mutual Funds’ Coffin
One of the huge reasons why we are excited about this is that the only true advantage that mutual funds had over ETFs and the advantage that mutual fund salesman love to talk about is that you had to pay commission to buy ETFs whereas mutual funds could be purchased with small periodic investments (usually a monthly example is used) without any siphoning away of investment resources. While this was true, the mutual fund salesman usually leave out the dozens of other reasons why mutual funds really aren’t a good long-term investing strategy at all. Now, even that advantage is gone and low-cost investing strategies that focus on buying basic ETFs and watching them grow for decades before selling them is even more profitable.
Great job Questrade (and a couple of key competitors that helped introduce the idea to the market). Keep up the low-cost focus and we’ll keep singing your praises! For some of the students out there thinking, “Man, I can barely keep track of student loan spending, never mind this investing stuff,” that’s cool, we’ll get back to everyday student tips soon enough. I highly recommending introducing yourself to basic investment concepts now though. I wish I had when I a Frosh!