How to Start Your Hoard

Surely one must be a large, strong, vicious dragon to start building a hoard, you’d think. Surely fire-breathing will be necessary, angry growly noises will need to become your first language, and hours will be dedicated to sharpening those razor sharp claws. After all, it’s not like some tiny, smoke-spewing, pale-scaled wyrm could survive the stock market, right?

As it turns out, you’d be wrong!

And that, right there, is the very first hurdle that you’ll need to spread your wings and hop right on over.

I’ve had many conversations with many fellow dragonkind, from juveniles still itchy from their fast-growing scales to elder dragons with spikes the size of lances. Surprisingly, fear of the unknown does not discriminate against age. But let’s make this entirely clear:

“Investing is not actually that hard.”

Shock! Horror! Surely not!

It is a very common misconception, and one that everyone would be better off without. Yes, investing seems scary, the stock market seems complicated, it all seems very daunting. But really, once you have the basics covered, there’s really not much of a learning curve. You put money in, you top up your stocks, and you log out.

It’s not like you have to pillage a dwarven city, kill its inhabitants, and then spend the next century angrily spewing smoke signals to keep the riff raff out. That would be complicated. And possibly deadly.

However, there are ways that you can make investing deadly, and there’s a very simple way to avoid this: Accept the fact that you are ordinary.

Accept your fate! Accept it! Can you predict fortune cookies? Do you have an anti-ESP result to predicative card games? Do you have dreams that come true? Do you win the lottery on a weekly basis? No? THEN DON’T TRY TO PICK STOCKS. You will fail, you will lose your entire hoard, your castle, your bond-mate, and then some story-teller will shoot you with a massive arrow, just to top it off. Seriously! Just don’t!

The stock market, on average, makes 7% a year, just by existing. The economy chugs forward, dragonkind makes advancements, inflation happens, and the stocks, on average, just keep going up. This is on a long-term basis, but that’s what good investing is:

  1. Long-term – go for the long-haul, there is no such thing as getting rich quick
  2. Diversified – buy the whole market, and you’ll make that same 7% return
  3. Balanced – have both the stocks that grow and the steady ones that rarely falter

Good investing, which does not in any way involve stock picking, is not scary. It’s easy, it’s routine, and cheap. It doesn’t involve banks, or an advisor. It involves buying the whole market, getting the 7% at very low risk, and living your life just as you already do.

But how do I buy the whole market, you ask? Surely that’d mean you already need to have a hoard the size of a dwarven city!

As a matter of fact, no it does not, because of one beautiful thing: index fund ETFs.

You’ve probably heard of mutual funds – big bundles of stocks that the banks hoard, but they’ll sell you a small slice of it (for a fee, of course!). ETFs, or “Electronically-Traded Funds” are a lot like mutual funds, except for a few key differences:

  • They don’t have managers, so you’re not paying the exorbitant fee for some bank-mad idiot who probably can’t predict the stock market anyway (there have actually been studies where literal monkeys choosing at random do just as good in the stock market as so-called “experts”), and
  • They’re computer-run, they automatically pick up new stocks, and therefore they remain consistently balanced, never “missing out” on any part of the stock market.

ETFs still pay dividends, they’re still publically traded, and they’re way cheaper than mutual funds, usually charging an MER (management expense ratio) of a fraction of a percent, compared to the 2-3% charged by most mutual funds. And in a stock market that makes 6 or 7%, cutting out 2-3% can be a severe drain on overall portfolio growth.

In fact, if you need a million to retire, you put in $10,000 a year, and you only make 4% versus 7%, this is what it can look like:

Years to Retirement at Different Growth Rates

At 7%, it takes 30 years to retire. At 4%? Forty-one years, or eleven years longer. In short, that MER can have significant consequences over the long-term. And this is why, overall, I very strongly recommend ETFs over all other kinds of investing.

But let’s get back to the bare bones of what we’re doing here.


The Basics:

Building your hoard is a fairly straightforward process, which can be broken down into five steps:

  1. Open an investment account.
  2. Choose your risk allocation.
  3. Choose your ETF allocation.
  4. Buy your stocks.
  5. Wait, and repeat step 4 on a regular basis, topping up each ETF based on your allocation in Step 3.

Slowly but surely, over years of repeating this process (and hopefully putting increasingly more gold) your hoard will get bigger and bigger, until it gets to the point where you can retire. You’ll never have to rely on a bank manager, or risk losing all your money. And at the end, if you want, you can take it all out, convert it into gold, and then curl up and sleep on top of it for a couple of days, just for the sheer pleasure.

…I take that back, that’s a good way to attract dwarves. And you know, get killed violently. Moving on…


STEP 1: Opening an Account

This can actually be one of the most daunting parts of starting your hoard, if only for the massive number of options that are available. But before you begin a Google search, which will ultimately scare you off, let me break it down. There are two main types of investment platforms:

  1. Bank-owned investing platforms, such as TD WebBroker, Scotia iTrade, or BMO InvestorLine, and
  2. Dedicated investing platforms, such as Questrade and Qtrade Investing.

The main difference between the two is this: One is primarily a bank. The other is primarily a broker. Banks are large, diversified, and tend to offer their investing platforms as a side-business to their bank accounts and mortgage operations. Dedicated brokers, however, are primarily about helping people invest, and so they tend to win the awards for best user experience, best customer service, and best fees. Banks generally also charge more than dedicated brokers, though this is not always the case.

If I were to recommend one investing platform over all others, I would recommend Questrade, for many reasons:

  1. Incredibly user friendly,
  2. Easy to put money in (just like any other bill payment),
  3. Easy to open an account, or multiple accounts,
  4. Excellent monthly reporting,
  5. No monthly fees if you’re under 25 or carry over $5,000,
  6. Buying ETFs is free, no commission, and
  7. Carrying both USD and CAD is hassle-free, no extra fees.

I have considered a TD WebBroker account simply due to the convenience of being combined with my banking, but it has yet to be able to beat out the advantage of absolutely no fees.

Once the trading platform is chosen (I recommend reading some reviews if you are unsure), the next steps are easier. You simply go to the bank branch or website of your choice, and you fill out the forms and hand over the appropriate information to prove you are who you say you are. Then, you choose your account. This, again, can seem daunting, but there are three main kinds of investment accounts:

  1. Tax exempt accounts – such as the TFSA or Roth IRA
  2. Tax-deferred accounts – such as the RRSP or traditional IRA
  3. Taxable accounts

For the average person making the average salary, it is best to first max out your tax-exempt accounts (which you can use as emergency savings and pull from whenever you need), and then max out your tax-deferred accounts (which you can’t), before you ever open a taxable account. For a Canadian, this means that you max out your TFSA, then your RRSP, and then you open a taxable account. So, wherever you are in that progression, open the account you need.

Just make sure you choose a direct-investing account, and not a managed account, because the whole point of this is to be your own DIY expert in investing.

You might have to wait a few days for everything to be set up, but that isn’t a big deal, because you’ll need time to….


STEP 2: Choose Your Risk Allocation

I know I said that ETFs are low-risk, but that doesn’t mean no-risk. This is because ETFs come in big baskets of similar stocks. For instance, you could choose an ETF that holds bonds. Bonds are very stable, very safe investments. They pay very little in dividends, but they always pay dividends. They are dependable.

On the other hand, you can also choose an ETF that holds high-growth American REITS (Real Estate Investment Trusts). Real estate is sometimes a bit wobbly, it can pay huge dividends in some years and barely force out a trickle in others. They are riskier, but they also have more potential for growth. Bonds don’t grow. They just sit there. Like rocks. Really stable, valuable rocks.

In short, most ETFs can be classified into two different categories:

  1. SAFE  – which consists of dependable, low-return things like bonds and preferred shares, and
  2. GROWTH – which consists of fluctuating stocks that can grow a lot in value, like REITs and equities.

Your risk allocation, which is your own to choose, is simply the percentage of SAFE versus GROWTH ETFs that you’d like to hold. As an example, a 40:60 ratio of safe to growth is considered a fairly conservative, safe risk allocation, which is recommended by most investment advisors for those in their mid-30s and up. If you’re younger (and therefore have more time in which to accidentally lose money and make it back later), you could consider a riskier ratio, such as 20:80 safe to growth. If you’re an elder dragon just retired to a nice desolate castle and worried about the longevity of your hoard, a 60:40 allocation might be better.

As a 22-year-old dragonette, I could probably slot myself into the “young and reckless” category, but part of me freaks out at the idea of losing up to 50% of my hoard if the economy tanks, and so, like a 50-year-old, I actually do hold a nice, conservative 40:60 risk allocation. Which, might I add, still makes 6-7% a year in returns. And I have not, at any point, despite Trump and Brexit, lost any money at all.

Once you have your risk allocation decided, next up is:


STEP 3: Choose Your ETF Allocation

Essentially, the idea here is to pick ETF categories that match into your risk allocation that you picked above, while also diversifying on a global scale. To give you an idea of what that looks like, here is my basic allocation:

SAFE

(40%)

Government Bonds 8%
Corporate Bonds 7%
High-Yield Bonds 5%
Preferred Shares 20%
GROWTH

(60%)

Canadian REITs 5%
American REITs 10%
International REITS 5%
Canadian Equities 19%
American Equities 14%
International Equities 7%

To be clear, your allocation can be more complicated or less complicated than the one above (more complicated is easier if you have more cash to buy with). For instance, you could choose to buy exactly two ETFs (this is called a “couch potato” portfolio, but is a very valid investment strategy), one that is safe, and one that is growth, such as a Preferred Share ETF and a Global Equity ETF.

Once that’s done, it’s just a matter of choosing specific ETF stocks that fit into the category that you want. My way of doing this involved a spreadsheet with different tabs for each category, while I did a couple hours of Googling and wrote down every ETF I could find in each category. I then sorted them based on their dividend payout rates and MERs and chose the ones with the highest dividend payout rates and the lowest MERs (logically, the highest return).

My information would be two years out of date and not especially useful, so I recommend that you do a similar search. Regardless of what you choose, ETFs rarely lose money over the long-term, and there is no “wrong” choice as long as you are choosing a diversified enough category. For instance, if you buy an ETF that specializes in British Columbia wineries, this will be much higher risk than a buying a Vanguard or iShares ETF that holds a huge number of American corporate growth equities.

I am somewhat preferential towards iShares and Vanguard ETFs, which are strong dividend-payers, and also to anything that specifically has “Index” or “Index Fund” in the name. However, your own research will indicate what you prefer, and I encourage you not to be scared by the influx of information. Look for these four things and these things only:

  1. The name and symbol of the ETF,
  2. The “dividend payout ratio” or the “dividend yield” or “yield”,
  3. The MER, or sometimes just “Expense Ratio”, and
  4. The price per share, which will be relevant when calculating how many to buy.

For an average investor, those are the only things you need to care about. Everything else is just window-dressing. Once you have your stocks and your allocations, it’s on to…


STEP 4: Buy Your Stocks

The first and most important part of this is actually putting money in your account. It can be as little or as much as you want, though some brokers have a limit that requires an initial $1,000 minimum deposit. Once you can see the money in the account, it’s off to the races.

Main things to remember when buying stocks:

  1. When you calculate how many stocks to buy, make sure you convert any USD shares into CAD, or you may find yourself with the incorrect allocation.
  2. It is best to buy stocks when the stock market is open (9:30AM to 4:00PM Eastern Time on weekdays, or 6:30AM to 1:00PM in B.C., where I live). In off-hours, sometimes there are restrictions where you are required to buy in “board-lot” sizes, which is generally either increments of 10 or 100 shares. This can also mess up your allocation.
  3. Leave yourself a bit of wiggle room if you are exchanging currencies, as exchange rates sometimes change and having a buy-order denied due to lack of funds is never a fun thing.

And the next part is easy. Take the cash you’re putting in, multiply it by your allocations, and divide by the ETF’s price to get the number of ETFs you are buying. For example, if I have $1,000 and I’m buying 40% of ETF 1, which costs $5.50, and 60% of ETF 2, which costs $14.75, I might do the following:

$1,000 – $25 (wiggle room) = $975

For ETF 1 = $975 *40% = $390/$5.50 = 71 stocks

For ETF 2 = $975 *60% = $585/$14.75 = 40 stocks

Due to rounding, I will end up spending $980.50 and having $19.50 in cash left sitting in my account (less than the wiggle room, which is why the wiggle room is important). Just make sure you use the price that is in the currency you are spending when doing these calculations.

Once that’s done, it’s just a matter of pressing buttons. In Questrade, for instance, I would:

  1. Log into the trading platform,
  2. Click “Buy/Sell”,
  3. Type in the Symbol for the ETF I am buying,
  4. Type in the amount of shares I’m buying,
  5. Choose the “Market” option as I just want to buy the stocks at the price the market is selling them for, and
  6. Click Buy.

Almost instantly, during trading hours, you will receive an “Order Filled!” notification that tells you that you are now the proud owner of an ETF. And that’s it, you have successfully invested!


STEP 5: Rinse and Repeat

Over the next few days after undertaking Step 4, you’ll probably feel an overwhelming urge to constantly log in and check on your investments. I encourage you not to. Investing is meant to be passive, and long-term. The ups and downs of a day are generally nothing over the long scheme of things. Log out, have a barrel of liquor of your choice, take a nice relaxing flight outside, maybe roast some knights, and continue with your life. At next month’s paycheque, that will be the time when you can log in again, because it’ll be time to put in more cash and top up your investments.

Time to build that hoard! Some prefer to do biannual or annual investments, but I generally prefer to get the cash out of my bank account and into the hoard ASAP, if only to avoid spending it on books or shiny things.

…I have a dragonish weakness for shiny things….

So go on and log back in. If you bought an ETF that pays monthly dividends (some pay quarterly and some annually), you might actually see that your cash balance has increased as well, like magic. Once you’ve put in your new investment, you should remember to add the current cash balance to the new deposit, and then it’s back to the calculations.

This time, you’ll need to add up the market value of your ETFs plus your cash balance. Lets say your stocks from Step 4 are now worth $995, and you have an initial $25 in cash (yay dividends!) plus another $200 that you’re putting in. That means your total amount is $1,220. Again, we have to multiply this by the allocation rates:

$1,220 – $25 (wiggle room) = $1,195

For ETF 1 = $1,195 *40% = $478

For ETF 2 = $1,195 *60% = $717

However, we already have stocks, so we can’t just divide this by the current stock price and buy more stocks – we wouldn’t have enough cash. So, instead, we have to deduct our current ETF values from the amount we want. Let’s say our 71 stocks in ETF 1 are now worth $400 and the 40 ETF 2 stocks are worth $595, and their prices haven’t changed.

For ETF 1 = $1,195 *40% = $478 – $400 = $78/$5.50 = 14 stocks

For ETF 2 = $1,195 *60% = $717 – $595 = $122/$14.75 = 8 stocks

We buy these, spending $195 (leaving $25 in our cash account as buffer), and we’re back to our same allocation. In some cases, you might need to sell some stocks and buy more of the other to get back to the correct allocation, and this is also fine.

And that’s it! If this same process is repeated, and more and more cash is funnelled in throughout your lifetime, eventually, you will reach a point where your hoard is large enough to truly be a hoard! It might be a retirement hoard, a new-hatchling hoard, a fly-free-and-travel-the-world hoard, but it will be yours, to do with as you please.

With an initial bit of courage and some dedication, yes, even tiny, smoke-spewing, pale-scaled wyrms can have a hoard that would make Smaug red with jealousy.

Wait, isn’t he already red?

We must be doing well then!!!

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