Pure index investors: Please stand up

Early in January, popular blogger and fee-only financial planner Robb Engen announced on Twitter and his Boomer & Echo site that he had finally bitten the bullet—he’d liquidated his portfolio of individual dividend-paying stocks in order to become a 100% “pure” indexer. As he subsequently revealed in a blog at the Financial Independence Hub, he “felt like a part of me died,” but nevertheless manned up and sold off his 24 stocks, $100,000 worth of them. He replaced them with just two Vanguard ETFs that happen to be MoneySense ETF All-Stars: the All World ex-Canada ETF (VXC) and Canada All Cap Index ETF (VCN) and “that’s it.” Click on the link for the full story but the rest of this blog is about two young investors who responded to my request for similar dramatic Damascene conversions. It had seemed to me that Robb’s heroic conversion was unique although the pages of MoneySense’s magazine and books have occasionally been graced by a similar tale from Millionaire Teacher Andrew Hallam. Jason St. Hilaire (@TcommeFinance) is 31 and lives in Quebec City. The medical physicist started to invest seriously in December of 2011, when he put the ING Direct Balanced Fund in his TFSA and ING Growth Equity Fund in his RRSP. His early research made the case for index investing, so he put four TD e-Series funds in his TFSA (the Global Couch Potato portfolio). “At some point I even bought some Bitcoins. You can see that I was all over the place.” Then, like Robb before his dramatic turnaround, in the summer of 2012 St. Hilaire discovered the Canadian Drip Primer and the DRiP Investing Resource Center. “I figured I could try my hand with good dividend stocks with nice yields…I built myself a 10-stock portfolio with no real investing plan whatsoever. I would buy what I would feel like buying.” By 2013, he and his partner were raising cash to buy a home, liquidated the index funds and transferred the stocks to their brokerage account. They still have three stocks: “I see the stock market going down and can’t help but tell myself to wait until my positions recover. Can you say ‘behavioral bias?’” Unable to stay completely out of the market, early in 2015 he restarted his Global Couch Potato portfolio in his TFSA, adding $200 every other week. “The dividend stock experiment was fun, but I don’t want to spend so much time researching companies and trying to find bargains. In my situation, going with market returns with a simple portfolio is appropriate. I just need to get over my own nonsense to finally become a pure, 100% index investor. And now that I just confessed this to someone, I might just do that.” Another young investor who contacted me was PaAt McIver (@mrpatmciver). After a brief fling picking individual stocks, he and his wife became “100% pure indexers” in 2011. They use only index-tracking ETFs for their RRSPs and TFSAs, and even for their toddlers’ RESPs. “I had a professor at Carleton University tell me back in 2003 in his 3rd-year finance class that I shouldn’t bother trying to pick stocks, market time, or waste energy on trying to beat the market. He said the smartest thing we could ever do as investors was buy index funds (ETFs or mutual funds), and hold them.” Despite this, after graduating, he dabbled in Nortel, RIM, BMO, and CP but held them for only short periods and neither made or lost money. “I realized early on I was somewhat a risk-averse investor when it came to picking individual securities, and never had the confidence that I was able to identify the ‘winner’ fund or the ‘loser’ stock.” With prescient timing, they withdrew funds from their RRSPs in August 2008 to buy their first home, and started to re-establish their RRSPs in January 2009 (also great timing!). They owned Altamira Canadian Index, TD International Equity Index Currency-Hedged and US Index and the actively managed TD Canadian Bond. They departed from this only to buy a few shares of Canadian Pacific. In January 2011, after reading various blogs, including MoneySense, he switched his wife’s RRSP into iShares ETFs (25% XBB, 25% XIU, 10% XCS, 20% XSP, 15% XIN and 5% XEM.) Then Pat ditched the CP shares and a few mutual funds to go “all-in with index ETFs: 20% XBB, 35% XIU, 25% XSP and 20% XIN. “This past summer, I reduced the holdings in my wife’s RRSP from six to four.” Pat says the blended annual cost is 0.31%. “We also switched our XSP for VUN and switched XIU for XIC to broaden our diversification in the U.S. and Canadian markets, respectively.” They rebalance once a year. “When we started investing again in early 2009, I decided we would go with a mostly index-based portfolio. In 2011, I decided we might as well go on in and once our allocation weightings were set, just leave it and let it ride until we retire in 2036 (the earliest date we can retire as federal government civil servants). As a busy family man with a two-hour daily commute, Pat is happy “knowing I have a broad-based diversified portfolio that is low-cost and contains minimal funds gives me great comfort (and no sleepless nights) that I don’t have to worry about whether I am ‘winning’ or ‘losing’ vis-a-vis the market. I doubt I would ever go back to being an active investor ever again.” So, counting Andrew and a handful of advisers I know, I’m aware of half a dozen truly pure indexers. Anyone else out there? Email me. Jonathan Chevreau is editor-at-large for MoneySense and runs the Financial Independence Hub. His email is [email protected].

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.