There’s something about taking a look at processes that intimidate you and seeing if you can break them down into smaller steps that are more manageable. I’ve been thinking about shifting some of my investments from TD e-series index funds to exchange traded funds (ETFs), since that seems to be the next step in my personal finance journey. I’ve held back from making that decision, though. On one hand, it only makes sense if you commit a large amount. On the other hand, it’s a little scary to experiment with an amount large enough to make a difference.
My investing story has been all about baby steps. I started with TD e-series funds soon after receiving my first paycheque in 2007. I chose those index funds because of their low management expense ratios (MERs). I invested as much as I could, ignoring the doom-and-gloom of 2008. If I’d carved out more of my budget, I could have taken more advantage of the recovery. But in retrospect, I probably would have made the same decisions; most of my savings went into building an emergency fund and an opportunity fund, and that was important for making me feel safer and encouraging me to take small risks. As I built a good safety net, I invested more.
This has been going well so far. I’ve settled into a rhythm of rebalancing by way of annual contributions. I think I’ve reached the point at which it makes sense to switch to ETFs, since those have even lower MERs. Most forum posts I’ve read about ETFs focus on discount brokers like Questrade because of their free or low-cost trades, but I’m hesitant about switching to Questrade because of the customer service complaints I’ve read. I know that’s slightly irrational, biased by salience; the horror stories stick in my head, even though I know lots of people are happy with it and I have the persistence to deal with technical issues.
Maybe I can dip my toes into the ETF waters by converting the Canadian index fund investments I have in my RRSP into something like VCN, but within TD Waterhouse instead of creating an account with Questrade. This means that I’ll need to spend $10 each time I buy shares instead of buying them for free, but since I’m planning to hold these for a very long time and I rebalance yearly, the difference in transaction costs is likely to be worth it if it gets me to act.
It looks like putting in a limit order is the best way to do this, so I’ll take care of that once the money from the sale of my e-series fund arrives in my investment account.
The difference between the MERs for the TD Canadian Index e-series fund (0.33%) and VCN (0.10%) isn’t much for the amount I’m looking at experimenting with, but it’s more about getting over the intimidation factor of trying out ETFs. If I try it and it works out, I might try converting some of my non-registered investments when the capital gains make sense (either a low-income year or one of the inevitable slumps in the market). Alternatively, I might try the popular approach of accumulating investments in an e-series fund (maybe the TFSA, especially if they increase the contribution room) and then periodically converting that into ETFs.
I’m cautiously optimistic about how the stock market will perform over the next few decades. Its recent gains don’t quite seem connected with the struggles of jobseekers and small business owners around me, and there’s some kerfluffle over oil prices that I don’t quite understand. But I’m less concerned now than I used to be about demographic-related stock market crashes (someone pointed out that many people don’t have that much invested in the stock market anyway), and sufficient savings can help me ride out a 2008-style downturn. We don’t seem to be headed towards decades-long malaise. Even if we do end up with market difficulties, chances are I’ll be right in the same bucket with everyone else, so it’s no big loss.
I’m still nowhere near ready to pick individual stocks, much less day-trade. Neither my self-confidence or my ambitions are strong enough to tempt me to that path.
More than that, investing in frugal choices and skills gives me more independence. The more I can cook healthy, yummy meals with low-cost ingredients, the less I depend on finances. The more I can improve or entertain myself with free or low-cost resources, the richer life I live. As I build online and offline relationships with people who share similar values, my world grows.
The difference between the management expense ratios of TD e-series funds and index ETFs probably isn’t going to result in a significant difference in my investment results. Not as significant as the decision to keep investing, or the choice of a particular lifestyle. But as practice in breaking down and trying out intimidating things, I think it will be worthwhile.
Update: Converted my RRSP investments in the Canadian index to VCN. So far, so good! Things haven’t fallen apart yet, and I’m being careful about my record-keeping this time around…