How to Invest in the Stock Market on Autopilot
Do you want to start investing in the stock market but don’t want to do it by yourself? Maybe you are not comfortable managing your own investments and would prefer a professional to call the shots for you, but you still don’t want to pay high fees for that, plus, you don’t even know if you can trust said “professional”!?
If you want to invest in the stock market but want to have the following:
- Have a professional managing your investments
- Get the best possible returns with low risk
- Contribute money monthly to your portfolio on autopilot
- Sleep easy at night knowing that your investment is being taken care having YOUR best interests at heart
- Pay next to nothing for this service
Too good to be true? Yes, I thought it was too good to be true, I never thought that a service with those perks could exist. I’m an active investor myself, which means I take care of my own investments, I decide which stocks to buy and sell, but I know that this strategy is not for everyone and this is not something to be ashamed of, to the contrary, knowing our strengths and weakness takes courage!
Since I have many friends and followers asking me the same: “Derek, I want to Invest in the Stock Market but I don’t know how to do it, or anything about it, I just want someone else to take care of my investments!” My initial response was usually: “Well, you need to open a brokers account, select some Index ETF and make sure to buy them each month”… And after that I would just get a blank stare…. Way to go Derek….
What is a Robo-Advisor?
Surprisingly a Robo-Advisor is not a robot! (sadness…) Instead, a professional investor designs a portfolio based on ETFs which are basket of stocks that track an Index, these indexes are usually the entire US Market, European Market, Emerging Markets and Bonds among others. This professional creates a portfolio according to our risk tolerance and input the data on a computer. What the computer does is to make sure that your portfolio always has the same proportion of those ETFs in order to keep your risk level constant.
The idea of tracking an Index is not new, matter of fact, Warren Buffett suggest that anyone who wants to invest in the Stock Market, but don’t wan’t to put the time on it should simply buy a basket of Index Funds and hold them forever. So, the Robo-Advisor will do this for you, on autopilot! Neat eh?
Why Index Investing?
Index Investing or Passive Investing is based on the fact that most active investors can’t beat the market, so if you cannot beat the market, then own the market! This way we will make sure that we always get the same return of the market. To do this, one buys an ETF which is a Stock that holds several stocks, so the ETF Index SP500 will contain stocks of the 500 biggest traded companies in the US.
Now, to make this strategy even better, we have to make a portfolio with several other Indexes, like Canadian Stocks, Emerging Markets, European Stocks, Corporate and Government bonds among others. By doing this, we are creating a portfolio that has low risk and good returns
Where do I get one of those fancy Robo-Advisors?
There are several robo-advisors services out there, but I would never recommend anything that I wouldn’t use myself, after reviewing several of them, I settled with Wealthsimple! This is the only service that I trust and recommend!
What I like about Wealthsimple?
Only 3 portfolios to choose from: the thing that I hate the most is having 1000 options, it puts me on analysis paralysis mode, Wealthsimple recognize this fact and have only 3 portfolios which are broken down on “risk tolerance” levels which are Conservative, Balanced or Growth Portfolio. The main difference between these 3 portfolios is simply how much they put on bonds, the lower the risk, the more bonds you own, but the lower your returns will be.
Low fees: I hate fees, which is the reason why I hate mutual funds so much! Mutual funds are great, until you realize that you can lose almost 40% of your retirement due to fees (Check the post “Investment Fees Matter“)
Autopilot mode on! Yes! The only thing you have to worry about when you invest with Wealthsimple is about selecting your portfolio and making sure you have money going into the account each month! That’s it! They will make sure to rebalance your portfolio, manage the ETF’s and make sure that your portfolio has the best performance according to your risk tolerance.
What don’t I like about Wealthsimple?
I can’t choose the ETFs: hey, I’m an active investor, which means I like to tinker around with my portfolio, I don’t like other people telling me what should I have or not on my portfolio. Although the 3 available portfolios are great, I would like to swap some ETFs from the portfolio for other of my personal preference. This by itself is NOT a bad thing if you just want to have a “set it and forget it” approach to your investment.
Their “Risk” Explanation: I’m sorry Wealthsimple, but you kind of failed there, Risk is the possibility of losing money while volatility is how fast your investments can go up or down. Who likes risk? NOBODY! But, if you are on your 20s or 30s, you have plenty of time in the market before you cash out your investments, which means, you shouldn’t own any other portfolio than the Growth Portfolio. If you are 10 years close to your retirement then maybe you should think about having the Balance or Conservative Portfolio. Fun Fact: Wealthsimple suggested a Conservative portfolio to a friend of mine who is 24 years old…. #fail!
The fees…: Wait, what? Didn’t I just say I like the fees? Yes I did, but again, you have to remember that I’m an active Investor which means that I would buy by myself the exact same ETFs that Wealthsimple have on their portfolios and replicate the portfolio on my brokers account and probably reduce the fees from 0.5% to 0.25% (Check the post “Investment Fees Matter”), which is half, but at what price? Well, I now have to take care of the portfolio myself, make sure that everything is correct, the allocations and everything… So again, if you like the autopilot approach, Wealthsimple is for you
How does Wealthsimple works?
Step 1 – Open your Account
In order to open an account with Wealthsimple, you must either be a resident in the US or Canada and make an initial deposit of $0! Yes, that wasn’t a typo, so if your excuse is “Derek, but I don’t have $1,000 to invest” then please put that excuse on a box and throw it away.
Once you registered for your account you will have to decide what type of account you would like to have:
- TFSA: Your investments will be tax protected and won’t get taxed when you withdraw the money
- RRSP: You will get a tax refund on the current year, but you will be taxed once you start withdrawing your money
- Normal Account: This account is NOT Tax protected, I wouldn’t recommend this one.
If you are just starting I would recommend opening a TFSA account. I’m not a Tax Advisor so make sure to consult with an expert.
- Roth IRA: Your investments will be tax protected and won’t get taxed when you withdraw the money
- IRA: You will get a tax refund on the current year, but you will be taxed once you start withdrawing your money
- Normal Account: This account is NOT Tax protected, I wouldn’t recommend this one
Just like on my Canadian recommendation, I would suggest to open a Roth IRA account, just keep in mind that I’m not a Tax Advisor! Please consult with an expert!
Step 2 – Select your Portfolio
If you are on your 20s or 30s I would recommend the Growth Portfolio, why? Well, the balanced and conservative portfolio have bonds. Bonds are considered to be the “safer” investment but it’s like putting a handbrake on your returns, you are decreasing your risk but also your returns big time. Since you have several years in the market, if the stock market crashes, you will have time to recover and make a profit, so for whatever is sacred to you, don’t ever sell your investments on a market crash E.V.E.R.! Please check my post with 5 things you should do during a market crash.
Equities (Stocks) will always outperform Bonds on the long-run! Now, if you need the money in 10 to 5 years or less, then please, don’t own just Equities, move your portfolio from Growth to either Balanced or Conservative!
Step 3 – Fund your account
Yup, that’s it, make sure to set an automatic transfer from your checking account to your Wealthsimple account and that’s it! Sit down, relax and watch your money grow!
The last question I get is “Can I withdraw my money at any time?” to which the answer is yes, you can do it at any time, just keep in mind that depending on the account you have (RRSP, IRA) you WILL be taxed if you had any gains.
Disclaimer: I would never recommend a product unless I use it too. The links in this post are affiliate links, meaning, at no additional cost to you, I will earn a commission if you click through and open an account.