How I Turned $100 Into a Six-Figure Portfolio


How do you know you’re doing the right things, if nothing is happening?

For new investors this is one of the hardest problems. You might learn all the steps to follow… you calculate how much you’ll end up with in 40 years… you can talk to others who have done it… but it just doesn’t seem real at first.

You invest your money the way you should and a few months later you get your first dividend for a whole $0.27.

For years it can seem like nothing is happening.  Meanwhile you hear about a friend who made $10,000 buying stock in a small oil company. Would that be faster?

You promise yourself that you’ll invest more if you have some extra cash at the end of the month. But it just seems so hard to be motivated when you aren’t getting anything for it.

This is exactly what I felt when I started out. My first investment was $800 that I used to open an account at CIBC. After realizing that their fees were too high I decided I would switch to TD. My next move was opening an account there. Four months later I set up an automatic transfer of $100 every month to my investment accounts.

At that time I would get dividends of just a few dollars – after all the research and preparation I had done and even saving up for a few months to get that first $800!

We know it takes time. But who doesn’t struggle to do something when it seems like it will be meaningless for the next 5 or 10 years? If you feel that way you’re not alone. Even though it was hard I did wait and my portfolio did grow. But I did one other thing besides waiting and that’s what I’m writing about today.

Six years after I opened my first account I checked the new balances after a regular monthly contribution and noticed that all the accounts added up to over $100,000. Even though no one is going to retire on an amount like that it felt like a huge accomplishment to know that all my hard work had gotten to that point and I could finally see my investments growing on their own.

At the beginning I couldn’t imagine my portfolio growing quickly, giving me hundreds of dollars in dividends on one day like it does now, or gaining over $2,000 in one week on its own like it did recently. After reaching this milestone it started to feel a lot more real.

A little extra push

So what’s the big secret to go from $100/month to a $100,000 portfolio? Is it a hot biotech stock that tripled my investment? Is it knowing when the US stock market was about to take off? The truth is that I barely pay attention to the markets. And I’ve only bet $80 on specific stocks (I was right but it was too late).

It’s actually the $100/month that’s responsible. In case you don’t feel like doing the math, investing $100 every month for 6 years will give you $7,200. Something’s missing right? How does $7,200 turn into $100,000 without having to be the smartest investment genius who ever lived or wait 100 years for it to grow?

Let’s look at the way many people try to invest. I was like this at first. We all have bills to pay so we say to ourselves, “I’ll invest whatever is left at the end of the month. I can spend a bit less this month.” But then something unexpected happens. And the next month. And the next.

There’s only one thing that stays the same: we never have anything left over at the end of the month. This is why it took almost a year to come up with the $800 I needed to open my first account. I had heard of another way and 4 months later when I opened my second account I set it up to automatically take $100 every month. Even though this was on top of all my regular expenses it turned out that I could suddenly afford it every month.

Soon I didn’t even notice this. It was like buying groceries – I knew it cost something but I didn’t stay up at night worrying about how to afford it. So I thought “why not $125?”. I updated the transfers. After a few more months it still didn’t seem like much. I changed it to $150. $200. $300/month. At least twice a year I would increase the amount.

Every time it was just a small step. Another $100/month? I don’t need to move to the cheapest part of town and eat rice and beans every day to do that. But when I kept adding to the amount that I put in every month it started to get bigger. Then the portfolio started to grow from all those contributions and from the gains after investing them. Those $1 dividends I had gotten at first turned into $10, then $50, then $100, then hundreds of dollars.

How to make it work

Now you don’t have to go as far as I did. Once I started to see the first increases in the total value it gave me even more reason to make small sacrifices so I could increase the monthly amounts. I never did anything that I would make my life miserable but I did have to make hard choices.

If you don’t want to go that far it’s ok. It may take a little longer but the same idea will work for anyone. You need to find your own way to do it. For example the anonymous Maritimer blogger who just reached a $1m net worth did it by working extra jobs and overtime and managing rental properties. Personally I couldn’t do that for long. Maybe you find it easier. Or maybe you have something you can sell for some extra income.

Anything you can do to increase your income and control your expenses, even just a bit, will help you more than you would think. And you can do it a little bit at a time. When we make big changes in our life quickly it’s hard to make them stick. Going from eating out every day to always cooking at home? Or starting an extreme diet? If you only do it for a month before giving up you’re not alone.

Small changes are so easy we don’t notice them. After doing them for a month they turn into a habit that we do automatically. And over time they really add up.

Every 6 months you can check back and see if you can do a bit more, even another $10/month. I never felt like $100/month would make me rich. I just knew that if I could do that to start with then I could put in more later. And if I did it every month without fail then it would add up.

Anyone can start this now

Can’t afford much? You only need $25/month. The amount might be small but that’s fine. Maybe you’ll start a new high-paying job or get a raise later. If you wait until then you might procrastinate for years before setting it up (let’s be honest, this isn’t at the top of your fun list). But if you start now then you can just log in and update the number instantly.

The amount you have now doesn’t matter as much as starting now and then sticking to it. It’s not the people who start out really fast who win, it’s the ones who start early and keep going for a long time.

I have one really important rule every time I increase that monthly transfer: I add less than I want to

Wait, what? This is investment advice that doesn’t force you to deprive yourself of everything you enjoy in life so you can save for retirement? Yes!

The most important thing is doing this every month for as long as possible, as long as you don’t lose your job or have a major unexpected expense. Pick something that you’re comfortable with. If you really can afford more then you’ll have another chance to increase it in a few months.

When this turns into a familiar habit you can keep doing it for a long time and when you do it for a long time it will change your life. Keep taking small steps and in a few years you might notice that you’re saving an amount every month that would have made you panic when you first started.

Besides, investing should make you feel like your life is getting better, not worse. I don’t torture myself to make it work. That means I can enjoy the journey in addition to the rewards it gives me.

There are only a couple of times in all the years that I’ve been investing where I had to decrease or stop the monthly contributions for a bit. I always got back to the previous amount as soon as possible. All the months when they did happen were more important than the few months when they didn’t.

If it takes you 10 years to reach $100,000, or 15 years, or even longer that’s ok too. After that it starts to go a lot faster. And if you keep making your monthly contributions they will help too. I don’t plan to stop them any time soon.

Doing it in your sleep

Good investing is not about doing more work, trying harder, or constantly changing from one investment to another. You should work hard at your job or raising your kids. Investing is more like planting a garden. A few good choices and some time are all it takes. Other than that you don’t even need to think about it.

If you plant the seeds for your garden in September you won’t get anything no matter how hard you work at it. But if you plant them early in the year, even if you don’t do anything after that, you might end up getting a lot out of them.

Investing early is the same as planting seeds early. It gives them more time to grow and that can make all the difference. Monthly contributions are like an automatic irrigation system for your garden. You aren’t doing more work but you still get more. And increasing your monthly contributions is like adding fertilizer. Put them all together and those small things add up to something far bigger.

While others worry about whether they’re saving enough, you can just smile and know that it happens in your sleep. If you really do end up with extra cash at the end of the month you can invest some of that but we know how rare that is!

Imagine if you had started investing $250/month 20 years ago (or your parents did it for you, if you’re too young) and you forgot about it until today. Wouldn’t that be a great thing to discover? That’s the gift you can give yourself. It seems like a small amount at first but when you leave it alone for long enough it will grow. And since it feels like a small amount – it’s a lot easier than having to come up with $25,000 in cash tomorrow – there’s nothing stopping you from doing it now.

The really great thing is that you can forget about complicated investment strategies

Pick a couple of good investments and do this, and it’s almost guaranteed that you’ll end up better off than most people as long as you have an average income, buy things you can afford, and don’t make any major mistakes or have really bad luck. This one action is based on the way that the smartest investors think and it’s so simple that anyone can do it.

It gives me peace of mind too. I can’t control everything that happens to my investments. All I can control is what I do. And when I do this the right thing is effortless.

So here’s how I want you to turbo-charge your investments in under half an hour:

  1. Set up an automatic transfer right after every paycheque or once a month. If you use mutual funds like Tangerine or TD e-Series, have it go directly into the funds you own. If you buy ETFs, have it go to your broker and then set up a reminder in your calendar, email, or phone that will tell you to buy more shares as soon as you have enough cash. If you’ve already done this go to step 2. Total time: 5 – 10 minutes.
  2. Pick two times a year, like January and August, when you will increase that monthly amount. You don’t need some complicated budget (the truth is, almost no one can actually follow a budget). Just log in to your account so you can see the automatic transfer, then ask yourself if that amount is creating serious difficulty in your life (and talk to your significant other if applicable). If not, how much more can you add every month? $10? $25? $100? $500? Update that amount and then going back to enjoying your life. Total time: 10 – 15 minutes per year.
  3. Leave a comment to let me know how this will change the way you invest!

What Is Index Investing?


As you learn more about the investment world you hear a lot of people talking about “index investing”, “index funds”, and “passive investing”.

If you aren’t completely sure what they are I’ll explain what makes them different and why they are so important.

Index investing and passive investing fit together very well so you will hear those two words a lot.

Personally I chose to passive index investing as the best way for me to go. When you’re new to investing it can all seem like another language. They are the best choice for investors who don’t know a lot about the stock market though so it’s worth understanding a bit about them. If you’re looking for a simple explanation that shows you what they are and why people keep talking about them, keep reading.

. . .

Have you ever been to a restaurant and felt like you couldn’t decide what to order? This happens to all of us. Investors have the same problem but the risk of making a mistake with their money is far higher. Instead of one bad meal they could lose hundreds of thousands of dollars.

Now imagine that you could order everything on the menu. Sure, a few things just wouldn’t be good. Other dishes would be a lot better than you imagined. If it’s a nice restaurant you would get good quality overall by doing this.

You probably can’t eat everything on the menu at a restaurant. But for investors this idea actually does make sense. That’s really what index investing means. It’s buying everything on the menu instead of trying to figure out the best choice.  If this sounds strange to you, you aren’t alone. With our jobs, houses, cars, and relationships we aren’t used to choosing everything at once and if we did it would only cause more problems.

It actually took a long time for investors to realize they could do this and it wouldn’t end badly. The first research on the idea was done 60 years ago and since then many studies have shown that it works. Even today a lot of people don’t believe the results though.

It’s like saying that flying is safer than driving. It doesn’t sound right at first. When you look at the numbers you have to believe it. But a lot of people are scared of flying anyways.

Index investing evolved out of the mistakes that we made in the past. Together with passive investing it is the best way for an average person to invest and make money without having to be a genius or read thousands of pages of financial reports. Today more and more people are starting to see this.

Why are we investing anyways?

The way you invest depends on what you want. If you want the excitement of winning a bit of money you can always go play blackjack at the casino. If you just want to talk about RRSPs all day… haha I’m kidding, you really want to avoid that as much as possible.

Most investors want one thing: they invest so they can buy future income. If you invest $100 in a company and it pays you back $300, that’s good. The investment that pays you the most over your lifetime is the best. There are thousands of investments that could do this. I invest in the stock market like many other people because it’s easy for anyone to do. That means we buy a small piece of a company (shares) so we are entitled to a portion of its profits.

But even people buying the same investment can do it for different reasons. There are two big ways to invest: short-term speculation and long-term investing.

If you buy shares in Ford because they are $20 today and you think they will be worth $40 next year, that’s short-term speculation. The price of a stock next year depends on popularity and the emotions of other speculators. This is very unpredictable and a lot of people lose money with speculation. But because there is always the chance that you could win big (like a lottery) it’s very exciting.

When someone says the stock market is a casino this is exactly what they are talking about. In the first stock markets 400 years ago there was a lot of speculation and this gave them their reputation as a gamble. The financial crisis in 2008 was caused by speculation too. People knew they were making bad investments but they did it anyways because they thought the price would go up a bit more.

There is another option. If you buy shares of Ford because you think it will make a good profit in the next 20 years and you want to own get a piece of that profit, that’s long-term investing. Big companies can keep making profits for a long time so this is a lot easier to figure out.

In the next 12 months anything from natural disasters to strikes could hit the company but in the next 10 or 20 years they will figure out a way to solve those problems. It’s like your career. One year you could get a surprise promotion. Another year you could get laid off. But over the 40 years that you work you can guess what you’ll be doing and how much you’ll earn.

Business is similar. The surprises are much bigger (even if you get laid off you won’t lose $10 billion!). But they average out if you wait long enough. Speculators are betting on those surprises. Long-term investors are betting on the whole “career” of a business.

Some speculators do well and make it seem easy (even if they just got lucky). Most of them lose it all pretty quickly unless they stop gambling. The long-term investors are the ones who do best. They are also called passive investors because most of the time they aren’t doing anything. They just keep owning the same shares or buying more of the same.

This makes passive investing seem a lot more boring than speculation since you can go for years without making any big decisions. But boring investing is the best way to make money and take less risks. Imagine being trapped in a burning building – you wouldn’t be bored, but you wouldn’t like it either. Speculating is like running around in a burning building trying to find something valuable. Long-term investing is more like building a house yourself and buying one thing at a time to fill it up.

It might not get your heart pumping but would you rather be in your perfect home where you chose everything, or in a building that could collapse on you at any moment? Passive investing is like this. You’re not going to get a big lottery-ticket win next year. But it is a lot simpler and less risky.

An investment story in three acts

There’s still one more question: which stocks should you buy? There are three ways that investors have chosen their stocks. The problems with the first two are what led to index investing. All three are still done today.

At first people just bought shares of a few companies they liked. In 1900 you might see that Standard Oil was making a lot of money and buy some of its shares so they would send you dividends. Back then companies didn’t have to tell investors what they were doing so you would buy the shares and hope for the best.

Speculation was very common back then. Irving Fisher was a well-known speculator in the 1920s. He was a Yale finance professor who made millions from inventions and made bets in the stock market to earn more. Unfortunately he lost it all in 1929 and spent the rest of his life with debts he could never repay.

Others just bought up shares and kept them for a long time. The “Coca-Cola Millionaires” are families that picked up shares in Coke a hundred years ago and just kept making more and more money through the years. Many fortunes have been lost by selling those shares 50 years too early! A farmer who bought one share of Coke in 1919 and left it to their great-grandchildren could have an estate worth millions of dollars today because of the profits the company made.

That’s what long-term passive investing is all about. But not every company is a Coke. It takes a lot of work to decide which companies will can well over the next 10, 20, or 100 years. And if you’re just buying a few stocks it still takes some luck. Kodak seemed like a good company when people hadn’t heard of digital cameras.

It takes time to do all that research. You probably don’t want to spend every weekend reading annual reports and going through detailed accounting notes to understand a business. But once someone figures out a few good companies they can invest a lot of money in those stocks.

. . .

This was the start of the second act and the modern mutual fund. The manager of the fund has one job: to do the research on a lot of stocks and figure out which ones have the best chance of making money. The customers send their money to the fund manager who invests it in the chosen stocks. The manager only has to do the research once and the customers don’t have to do any research. The manager takes a bit of the money every year as a fee and it works out for everyone.

There is one problem though. Soon after this started there were hundreds of mutual funds. Today there are thousands. Now you have to choose the best mutual fund instead of the best stock. Like with stocks a few mutual funds were really terrible and lost money for their customers, a lot did ok, and a few were really great.

It seems like the best managers would get most of the customers and everyone would be happy. But even the best investments might look like they’re losing money for 3 years, 5 years, or longer before they turn around. This is very common.

If you’re trying to figure out if the mutual fund manager who has your money is good at her job, what are the chances you will wait that long? Maybe they made a good decision and they just need more time. Or maybe they will keep losing money.

Because of this investors had to forget about long-term results and start making changes every few years, every year, or even every month. Mutual fund customers started to move their money from one fund to another as soon as things changed. But a fund manager’s luck can change quickly.

Even though the decision seems right, the customers take their money out of a fund that is about to do well (but was unlucky for a while) and move it to a fund that is about to do badly (but got lucky for a bit). This is so hard to figure out that most mutual fund customers actually do move their money to a different fund when they would have done better by doing nothing. It’s not because they are dumb. We just don’t know the future.

The fund managers realized that they needed to get the customers to come to them. Most customers take their money out of the funds that have done the worst recently and put it into the funds that have done the best recently. If Susan and Johnathan are both managing funds, and Susan is getting better results, it’s very easy for all the customers to move to Susan’s fund and put Jonathan out of business. Because of this customers watch closely and try to figure out which manager is best. The managers came up with two ways to take advantage of this.

Some of them decided to start speculating. It is risky but if they get lucky then they look really smart and they can get a lot of new customers. If they lose money they can just move on to start another fund. They aren’t the ones losing their life savings, the customers are. This is like breaking all the rules at your job in hopes of getting a promotion because it worked out. Even if it starts off well, something usually goes wrong. Many of these funds start losing money after they get a lot of new customers.

Other managers decided not to take any risks. Instead of just buying a few stocks they bought hundreds. Then if one of the stocks had a bad year it wouldn’t make a difference to them. That way their results are just average and they aren’t really doing worse than other funds. They might not get the most customers but they won’t go out of business by doing this. This is like doing the minimum work you need to at your job so you don’t get fired. You might not get a lot of promotions but you can always tell your boss that someone else is doing worse.

So mutual funds were a good idea at first but it turned out that a lot of managers take big gambles or just get paid a lot and avoid making decisions. And the millions of dollars that the managers get paid comes from the customers’ money.

Because of the way mutual funds work, the managers and the customers both speculate a lot and change their mind often even though they know it’s bad for them. But there’s a third option, right? Aren’t there some managers who do good work and don’t take big risks?

. . .

After the 1950s a few researchers at universities decided to study this. They knew a few mutual funds had done well without taking those risks. If a smart fund manager could pick good stocks a smart professor could pick good fund managers, right?

What they discovered was so surprising that even today a lot of people don’t believe it even after hundreds of studies that back it up.

There were a few fund managers who were honest and dedicated. And there were a few funds that did really well in the past, either because of hard work or luck. But no matter how good a manager seemed the researchers just couldn’t predict which ones would do best in the future.

If you invested money in a brilliant manager, another one who had just done well last year, one who just bought hundreds of stocks to avoid risk, and even a manager who had lost money last year, it turned out that all four had the same chances of doing well with the money you had invested.

This is so hard to believe because it goes against everything we know. At your job you wouldn’t expect that your worst co-worker will start doing great work next year and the smartest, hardest-working person in the office will get fired. But with fund managers this is exactly what happened again and again.

The researchers realized that just like playing roulette at a casino, they couldn’t predict which fund managers would win the competition. They could get lucky but it wouldn’t last. The market is just too competitive. As soon as someone makes it to the top they are quickly replaced. It’s like having to interview for your job all over again every morning while thousands of people fly in from around the world to compete with you. No one can last long. Many star mutual fund managers have “lost their touch” – or just run out of luck.

Mutual Funds Evolve

Then came the big question and the third act: why are we paying millions of dollars to brilliant fund managers who supposed to be the best when the evidence shows that they can’t do it? It’s not that they lost money. The average mutual fund does make money. Average isn’t good enough though. One good manager can do the same work as 100 bad ones so managers are paid a lot to be the best.

The fees that they charge can take away a quarter of an investor’s profits or more. If they really were the best this would make sense because they earned it. Who wouldn’t pay $25 to get an extra $100? Most fund managers don’t earn their fees though. Obviously most of them aren’t the best. And the ones that are the best don’t last for long. Why pay that cost if they just end up being just average or worse?

It turns out that some managers had the right idea. If they bought hundreds of stocks they were at least avoiding risk. The problem was just that this meant they were being paid millions of dollars to make simple decisions that anyone could do. So in the 1970s a few people created the first index funds to solve this problem. You invest in index funds in the same way that you invest in a mutual fund. They way they are managed is completely different though.

Instead of paying a manager to research the best stocks they just make a list of the stocks that match some basic criteria (like large Canadian companies). Then they buy all of those stocks. They still need to hire qualified people to do the work but they don’t need to pay salaries that are out of this world. Because of this the average index fund fees are 55 – 96% lower than mutual funds.

Their results will always be average. That’s ok though. Most mutual funds are average too. And since those mutual funds still have to pay big salaries they end up costing their customers more. The research shows that over three quarters of mutual funds will end up being average or worse. Most investors are going to get average results and there’s nothing they can do about it. They will still make money, but why overpay for those results if they can’t really do better?

How can this even work?

It’s partly because not just any company can be traded on the stock market. Only large, well-established companies can spend the millions of dollars that it takes to get started. And if they don’t follow certain regulations to protect investors they are removed from the market. Most companies on the stock market are pretty good businesses that follow strict rules.

Some companies will make more money but it depends a lot on luck. If you buy all of them then luck is on your side. Ten years ago we didn’t know that Apple would do so well. But index funds buy all the companies they can. Index fund customers got a piece of the profits for every iPhone even if they had never heard of it.

Some companies get unlucky too. Index funds also own the investment banks that can lose billions of dollars because of a single rogue trader. They are just a tiny part of the index fund though and those losses don’t make much difference. In the end it balances out.

It gets even better. If you invest in a single stock the company can go bankrupt and you will lose money. If you invest in a risky mutual fund the manager can make a bad choice and you will lose money. The stock or the fund might recover but a lot of the time the loss is permanent. Index funds can lose money too but because they own hundreds or even thousands of stocks in different industries and even in different countries, they usually recover from those losses after a few years. Customers who invest in an index fund and keep it for a long time have a lot less to worry about.

While mutual funds are built on speculation, index funds are built on passive long-term investing. On average they hold each company’s stock for 30 to 50 years. A few stocks get replaced every year because of bankruptcies, mergers, and new companies coming into the market. Other than that the index fund just keeps your money in the same stocks so you have a better chance of collecting a piece of the profit whenever they have a good year.

The average mutual fund manager today dumps their shares after 12 to 18 months (so why did they buy those in the first place…?). And the average mutual fund customer doesn’t stick around much longer. With all those constant changes a lot of people are missing out on the profits that are the reason they are investing in the first place.

Your job may be pretty much the same from year to year but in business and in the stock market there are shockingly bad years and amazingly good years. The best way to make money is to give it enough time for things to work themselves out. You wouldn’t have good relationships if you stopped talking to someone forever as soon as you had a disagreement for them. Many mutual fund managers (and their customers) work exactly like that. Index fund managers, and good index fund investors, know that it’s better to wait and work things out.

Because index funds are safer investments you can keep the same one for a long time without worrying that the manager is about to make a bad decision that will cost you money. Even the best mutual fund has very little chance of being good 10 years from now. You can count the managers who have been “the best” for 15 years or longer on your fingers. But the first index fund is still going strong 40 years later and still doing better than most mutual funds. If you had invested money in that fund in 1976 and never took it out you would have done very well.

And as it turns out, if you invested in every mutual fund that exists you would end up with results that are similar to investing in an index fund that has much lower fees. Investing in an index fund is like having all the smartest managers in the world working for you – while someone else pays their salary! It’s one of the best deals you can find.

Less work = more profits

Investors will always be tempted by the excitement of speculation. When fortunes are won and lost that fast we can’t help noticing. But for hundreds of years passive investing has been one of the safest ways to become wealthy even though it does take time. We know that it has a better chance of making you money, and it takes less work too. Index funds are a tool designed to give passive investors exactly what they need with even less work.

In the last 15 years investors have really started to take index funds seriously. They have seen that mutual funds are more expensive and more risky. There is a chance that a mutual fund will do really well. There’s also a chance that you could win the lottery. But you probably won’t. Successful investors don’t plan for that. They pick something that works and pay the lowest fees they can find.

For a long time people thought you had to be a genius to make money in the stock market. That’s not exactly true. You would need to be a genius to outsmart the millions of other people around the world who are trading stocks. But to make money you just need to pick a simple plan that works and avoid paying high fees.

Index funds and passive investing are the best way for ordinary people to make money, take less risks, and do less work. Doing this has allowed me to earn a good profit from my investments while ignoring them most of the time and never paying attention to the financial news. Thousands of companies around the world just keep on sending me money while I go about my life. That’s what good investing means to me.

Now, what do you think about index funds and passive investing?

Avoiding Currency Conversion Fees: How To Do Cheap Conversions

Last week  you saw the hidden currency conversion fees that banks charge when you buy US-based stocks or ETFs and the ways you can avoid it. The five options I explained will let you avoid converting between currencies so you don’t have to worry about the fees.

Sometimes there is just no other way though. If you’ve decided that it’s best to buy ETFs that are based in the US and your income is in Canadian dollars then you have no choice.

So now let’s finish off the list with two ways I have exchanged currencies without paying the full fees.

. . .

6. Use “Norbert’s Gambit” to convert Canadian dollars to US dollars more cheaply. This is a common trick that experienced Canadian investors do. Although it may seem complicated, if you have bought a stock or ETF you already know how to do most of it.

The reason it works is because some stocks are listed in both the Canadian and US markets. A company like Canadian Pacific is listed on the Canadian stock market and only trades in Canadian dollars, while a company like Apple is listed on the US stock market and only trades in US dollars.

But a handful of companies are listed on both markets. This means you can buy and sell their shares using Canadian dollars or US dollars. Even better, you can buy their shares using Canadian dollars and sell those shares for US dollars. This automatically does the currency conversion for you and can easily cost far less than the usual hidden fees if you are converting a large enough amount.

For example let’s say you received a $7,000 bonus and you want to buy a US ETF with it. If you just deposit that in your brokerage and enter an order, you’ll be charged a hidden fee that may be up to 2% ($140). But if you do Nobert’s Gambit to convert the currency you’ll only be charged two trading commissions which may total $20 – $100 depending on your broker. Then you can buy the ETF using US dollars.

There is one extra hidden cost with Norbert’s Gambit. Every stock has a bid-ask spread, which means that if you buy and then sell right away you will lose a bit of money. If a stock price is $70, you might be able to buy it for $70.02 or sell it for $69.98 right now. So if you bought the shares and then turned around and sold them immediately you would lose 4 cents on each share.

That difference is called the spread. The market always works this way but each stock has a different spread and it changes from day to day. There are only a few stocks you can use to do Norbert’s Gambit and they are usually popular companies so the spread is just a few cents per share.

For example I use RBC shares to do this. They have the symbol RY on the Canadian and US markets. Their stock price is around $70 and the spread the last time I checked was 4 cents. This means that if I convert $7,000 this way I’m losing $4 to the spread (4 cents per share for 100 shares) and $20 for the trading commissions to buy and sell shares. That total cost of $24 is far less than the usual hidden currency conversion fee.

This cost doesn’t change much, regardless of the amount. If you were only converting $1,000 the cost would be $20.50 because you still have to pay the two trading commissions. That’s over 2% of the total amount which is as bad as the hidden currency exchange fees at any broker I’ve seen.

So for small amounts it doesn’t make sense to do this. But if you convert $100,000 the cost is $77, far less than a 2% fee of $2,000. If you want to buy a house in the States this can actually be a good way to get the cash there.

I chose RBC shares because they are one of the highest-priced stocks that can be used. The share price doesn’t really matter, but you lose the spread on every share you buy. If the price is higher you don’t need to buy as many shares.

Remember that every company’s stock price can change quickly. If you can buy and sell the shares in just a few minutes this probably won’t affect you. But you don’t want to hold them for longer. It’s also good to wait 30 minutes after the markets have opened and do your trades after 10AM EST so the price doesn’t change as much as it does at the start of the day.

Make sure you check that it’s not a holiday in Canada or the US before doing this since you might be stuck with something you can’t sell right away if one of the markets is closed. You might also want to avoid doing this around the dividend record date. The last time I did this trade was one day before that date. Since all trades settle 3 business days after you do them (including the trade where I sold the shares), I was the registered owner of the shares at the time and received the Canadian dividend. And since I was borrowing the US shares for a few days so I could sell them, an amount equal to the US dividend was withdrawn from my account. This isn’t an issue for me but it ends up moving a little more cash around. And since I have automatic re-investment in my account I got 1 share of RY that I have to sell.


I do this in my RBC Direct Investing account. Let me repeat that so it’s not confusing: I buy and sell shares of RBC using my RBC Direct Investing account. They are one of the first brokers to let you do this all yourself. I just calculate how many shares I need to buy and put in the order to do that on the Canadian market, and as soon as it’s done I put in another order to sell the same number on shares on the US market. I check that I actually bought the shares before selling them. I always set a limit a few cents above the asking price so this usually happens immediately. Then to sell the shares I set a limit price a few cents below the bid price so they also sell right away.

With other brokers like TD you have to phone a trader and pay a higher commission. When you do this you want to prepare the buy order but not send it. Then you can call a trader, tell them what you want to do, and confirm that they will help you sell the shares immediately. After they say yes you can submit the buy order (by doing this yourself you pay the lower commission) and ask them to sell the shares for you. If they don’t know how to do it then you can just try again later instead of buying the shares and waiting. Because this takes longer, costs more, and you have to phone someone, it’s another reason that I avoid TD.

I have also done this at Questrade. Their rules change frequently but last time I did it you couldn’t even phone and have it done right away. You have to phone after buying the shares, but then they make you wait until the first trade settles which always takes 3 days. At that point the shares have been transferred to your account and they will let you convert them to the US market and sell them (remember you can request this ahead of time to avoid delays).

This can be a problem because the stock price for a company like RBC can change a lot in 3 days. In one 3-day period that I tracked this year it dropped by 2%, which is as bad as the hidden fee you are trying to avoid in the first place!

With Questrade I don’t use RBC shares because it’s too risky. Instead I buy DLR and sell DLR.U. This is a pair of related ETFs where each share owns $10 US. The DLR ETF trades in Canadian dollars and DLR.U trades in US dollars. Unlike RBC’s shares, both of these ETFs trade in the Canadian market even though one is in US dollars.

Because DLR is not an actual company, it’s not likely to lose a part of its value while I wait a few days. Each share is worth $10 US whether I trade them today or two weeks from now. And since it’s an ETF Questrade won’t charge a commission to buy the shares (only when you sell them). The spread is usually 2 cents per share. So if you convert $1,000 this way your cost will be a spread of $2 (2 cents for 100 shares, since each share is $10) plus one commission of $5 to sell them. That’s a total cost of $7. If you just let Questrade do the conversion their hidden fee of 2% would cost you $20.

Even though this is amazingly cheap, I don’t recommend doing this with Questrade unless you have a lot of time and you are willing to learn more details. They are harder to work with and sometimes you need to explain more to their agents or remind them a few times to get things done. If you are converting larger amounts and you don’t want to spend as much time on it, other brokers like RBC Direct Investing are well worth the extra cost.

One last note on this: some of the “evil high-frequency traders” are actually reducing the bid-ask spread so you can do this more cheaply. They are using computers to replace something that was once done by people. Naturally those people are complaining very loudly and telling everyone how the computers are ruining everything. But like with all technologies it can be done cheaper now. If you aren’t trading over $100,000 per day you don’t need to worry about HFT.

7. Use another currency exchange service. If you have Canadian dollar and US dollar bank accounts outside your brokerage, there are some services that will help you move cash between those accounts at a lower cost. I have used services such as XETrade and Knightsbridge to do this.

Some of these services require a minimum amount to do a conversion, as high as $10,000, and they may involve additional wire transfer fees. XETrade has fairly low minimum amounts. Typically the cost for a conversion like this might be 0.5 – 0.9% and there can be a wire transfer fee too since they aren’t a part of your bank. So to convert $10,000 you might pay $65 to the conversion service plus a $40 wire transfer fee for a total of $105. This is a total cost of about 1%.

They usually won’t tell you the exact fee. Instead they will give you an exchange rate that has the fee built in, just like the banks. You can call up a few of them to see which one will give you the best exchange rate. It can change every few minutes though, so don’t wait too long if you really want to know which one offers the best deal. You can then compare these to the current market rate on

For example if you are converting Canadian dollars to US dollars and they quote you a rate of $0.9000 while shows a rate of $0.9060 at the exact same time, the difference is 0.6% ($0.006 for every $1 you convert) so that is the fee you are paying them. This is good since banks and brokers have hidden fees of 1 – 2%.

Once you do this exchange you’ll have US dollars in a bank account. You need a broker that allows you to hold US dollars in your investment account like RBC Direct Investing so you can just transfer the money in and then buy some shares on the US market.

I don’t use these services these days because it’s cheaper to do Norbert’s Gambit. And if you have a brokerage account at the same place where you do your banking you can transfer the money back and forth instantly with no wire transfer fees. I do this even when it’s not investment-related since I have business income in US dollars.

But you might find that they work for you. If you have multiple accounts they can take the US dollars from one bank and deposit the Canadian dollars at another one as part of the conversion. They will work with any bank. They are a bit easier too since you don’t need to do any trading, you just call them up and tell them what you want. Once they have received authorization they do the rest.

. . .

Every Canadian investor needs to look beyond our market to do well. We are just a few percent of the world economy so we can’t ignore the other options. And our nearest neighbour, the US, has a market that offers the best of just about everything. As a Canadian investor you still need to work with our less competitive banks and brokers. Use these tips and you can get the best investments for your portfolio without paying extra to buy them.

I have done all but one of these things as I tried to find what works best. They all work and they aren’t too hard to do once you know the right thing to ask for. Right now I have accounts at RBC Direct Investing and Questrade. Both of them allow me to have US dollars in the accounts.

I also transfer in US dollars when I can to avoid doing a currency conversion and use Norbert’s Gambit at other times including when I want to change US dollars to Canadian dollars. By taking advantage of this I have put the majority of my portfolio into US-listed ETFs.

Thanks to these ETFs I pay very low management fees that average 0.12% per year to own shares of 10,000 companies that cover everything from the apartment building down the street to Chinese forestry. And I can do all of this from an app on my phone. When you know what to look for we have options that no one would have imagined 30 years ago.

As you can see each broker is different. When you’re choosing a broker check which options they give you to see if they will make your portfolio management easy. And if you find that you can’t do some of these in your current accounts you can always switch to a different broker. If you stay even when they aren’t offering you what you need they will have no reason to improve.

The Second Biggest Hidden Fee Canadian Investors Pay (And How to Avoid It)

As you know the Canadian investment industry is very good at separating people from their money. The biggest hidden fee we pay has been in the spotlight for a while now. It’s the management expenses of mutual funds which can eat up a quarter or more of their average returns every year.

So once you found out how much you are paying for fund management you decided it’s not worth it and you want to manage your investments directly using index funds, ETFs, or individual stocks.

Now you’re paying a lot less in management fees. But you still be running right into another fee without knowing it. This one is hidden even deeper. Like a mutual fund’s fees it is collected behind the scenes so it looks to you like nothing has happened.

Unlike fund management fees it isn’t required to be disclosed in a way that makes it easy to find. And unlike paying a high fee for a brilliant fund manager (as rare as they are) it has absolutely no possible benefits at all for you since there is literally no difference in what you are getting for the fee.

Every broker does it differently. If this problem is affecting you, it’s important to consider it when choosing a broker and find one that will make it easy to pay less fees. Later on you’ll see which brokers have been good and bad in my experience.

What is this secretive fee? I’m talking about the currency exchange charges that are applied every time you buy or sell a stock or fund in a currency other than Canadian dollars.

How it happens

When you’re studying how to manage your own investments it doesn’t take long to find someone recommending a US-based index fund or stocks that are located outside of Canada. And this is for a good reason. Canada’s small market doesn’t always provide the best choices, or even enough to build a full portfolio.

There is one catch though. When you’re trading in a market outside of Canada you need to use another currency. Foreign stocks and ETFs, and even a few Canadian-based ones, are priced in US Dollars, Euros, or another currency. You have to buy and sell them in that currency. As any experienced traveler will know, the cost to do this can vary a lot. Most brokerages will conveniently do the conversion for you so you just deposit your cash and buy the fund or stock you want.

When they do they will usually charge a hidden fee of 1 – 2% of the total amount. And some of them find creative ways to apply this fee more than once. If you sell a US fund and then buy a different US fund you might pay the fee twice in one day. That adds up quickly. Good decisions can become a bad move once this fee is applied.

The same story happens with dividends from foreign stocks. When you receive the dividend you can be charged the fee to convert it to Canadian dollars, and then charged the same fee again when you use it to buy more shares outside of Canada.

This fee is buried deep so most investors never see it. You just get a worse currency exchange rate so you end up buying a few less shares, and you lose out on the compounding gains of those extra shares forever.

Banks and brokers charge these high fees because most investors don’t notice and wouldn’t know what alternatives they can use. But now there are a few ways that you can do the conversion yourself at a lower cost and avoid these high fees.

. . .

How to avoid it

Some people might say that they will only buy Canadian stocks and funds to avoid this fee. This can work in some situations. But for a really diversified portfolio it limits your options.

And the lowest ETF fees you can get are outside of Canada. Even some of the cheapest Canadian ETFs have costs that are 3 or 4 times the fees charged by their US equivalents.

Here are all the common ways that investors avoid this unnecessary expense. All of these tips are for US Dollars since they are by far the second most important currency for Canadian investors. Some will work with other currencies too.

These tips show you how to avoid doing currency conversions, since you can’t be charged for them if you don’t do them. Next week I’ll show you how you can do the conversion yourself for a much lower fee.

1. Use Canadian ETFs or funds. The Canadian ETF market used to be limited to only a few indexes and most ETFs used currency hedging which is costly and often adds no value. Fortunately iShares, Vanguard, and BMO have added several new ETFs in the last two years that give investors access to new indexes and remove the currency hedging.

For example you might choose VUN, a Canadian ETF, to invest in the US market using Canadian dollars instead of VTI which is an ETF that trades in US dollars. The two ETFs hold the same stocks but when you buy VUN you aren’t paying currency conversion fees. You could also use XEF, a Canadian ETF for international stocks, instead of VXUS in the US market (note that XEF does not include emerging markets like VXUS so it’s not identical).

Because these funds trade in Canadian dollars you don’t pay currency conversion fees yourself. The fund managers do the work of converting the cash. For large ETF providers the price they pay for currency conversions is very low.

The management fees for these ETFs are typically higher than the US equivalent. But some of them come close, and it can be worth paying a bit more to avoid the large cost of hidden currency exchange fees.

The good thing is that you can do this with any broker. Since these ETFs trade on the Canadian market in Canadian dollars they work the same way for everyone.

2. Use a broker that doesn’t charge hidden currency conversion fees. Based on the reputation of Canadian banking this might sound like it’s impossible. But customers of CIBC Investor’s Edge are currently reporting that it will let you buy US stocks using Canadian dollars and not charge any extra fees. (I have not used CIBC Investors’ Edge myself)

There is still the exchange rate to consider. Right now $1000 in Canadian cash will only buy you about $900 of US ETFs and there is no way around that. But if you use another broker and pay the full currency conversion fee you’ll end up with a bit less.

This is a great deal for CIBC customers since free currency exchanges are very difficult for individual investors to get. The policy could change in the future though so it would be best to confirm it before making trades and check in once in a while to make sure you are still getting this advantage.

Some investors prefer to avoid CIBC because they can’t hold USD cash directly in accounts such as RRSPs, which other brokers do allow (see #3 below). If you aren’t keeping a lot of cash sitting around this isn’t a problem and avoiding the fee is worth it.

3. Use a broker that allows you to hold US dollars. This may not help you when you’re buying a stock or ETF (unless you use tip #4 as well). But if you sell one US ETF to buy another, or you receive dividends and use them to buy more shares, this is one way that you can avoid paying the currency exchange fees while doing that.

With most brokers, if you sell a US ETF or get dividends from a US stock they will convert the cash to Canadian dollars because that is all they allow in your account. But a few brokers will divide your cash balance into Canadian and US dollars.

If you sell a US ETF in one of these accounts you will get US dollars. You can then use those to buy something else on the US market. This makes it easier to avoid doing a currency conversion when you don’t need to. Questrade and RBC Direct Investing are two brokers that are known for this.

You still need to make sure your account is set up so all trades happen in the currency of that security. So if you sell a US stock you will get US dollars, and if you sell a Canadian stock you will get Canadian dollars. Some brokers will allow you to force all your trades to happen in Canadian dollars, which may lead to hidden conversion fees.

I have used both Questrade and RBC Direct Investing because they offer this option.

4. Deposit USD into your brokerage account. If you already have a foreign currency from income outside of Canada or the sale of a property then it doesn’t make sense to convert it to Canadian dollars in your bank account (paying another hidden fee), move it into your brokerage account, and then pay to convert it back into US dollars.

Instead you can keep it in a US dollar bank account until you’re ready to invest it. Then if your brokerage allows you to have US dollars in your account (see #3), you can transfer directly from your bank to your broker with no conversions. Just make sure the transfer is requested in US dollars and not Canadian dollars.

Once you do this you are free to buy any stock or ETF on the US market using that cash.

5. Use wash trading if you are selling to buy something else. For brokers that don’t allow you to hold US dollars (see #3) this can be a useful way to cut out some fees. Like #3, this only helps when you are selling one US holding in order to buy another. When you do this some brokers will convert the cash to Canadian dollars and then convert it back when you buy. By doing this they charge the conversion fee twice.

But some brokers such as TD Direct Investing will allow you to “wash the trades”. This can only be done when you make both trades in one day. Sometimes you even have to make them before a certain time like 3PM EST. When you do this the broker will add up all your trades at the end of the day and adjust the amounts to remove the currency conversions.

So if you sell $10,000 of one US ETF and buy $9,500 of another the broker will make sure no currency conversion happens on that $9,500. The remaining $500 will be converted to Canadian dollars and deposited as cash. TD even lets you have the cash put in a US money market fund if you want, so there is no currency conversion happening.

This way you can use the US dollars from a sale to buy something else without paying extra fees. The broker doesn’t do this unless you ask for it. There are two ways you can do it. You can call in on the day you place the trades and ask to have it done for that day only. Or you can call in and ask to have it done automatically for all future trades. When you call you just need to tell the agent that you want “wash trading” or you want to “wash your trades” and they will understand. If they don’t you can call back later and get someone who has heard of it.

There are specific rules so before making these trades you should call and ask if it’s available, how it works, and if there is a deadline every day that you have to make the trades before, and when it will take effect if you ask to use it for all your future trades.

You can only wash trades that you place yourself. Dividends are not eligible for this. #3 is the best way to protect your US dividends from fees. But remember that dividends are typically a lot smaller than your total holdings so your first priority should be to minimize fees on the bigger trades. If you pay an extra 1% fee to re-invest a $300 dividend you’re only missing out on $3.

I have used TD in the past and avoid it now. The wash trading option helps, but with other brokers that let you have US dollars in your account you don’t even need to do that. TD has been far behind other brokers for investors who use other currencies. If that’s important to you, avoid TD and try another one like RBC Direct Investing instead.

. . .

These are the most common ways to avoid currency conversion fees. Next week we’ll look at the two ways you can actually get lower currency conversion fees and save hundreds or thousands of dollars

I have done nearly all of these at different times. This has allowed me to take advantage of some of the unbeatable investments available in the US market. Once you have done them a couple of times (or set up the right account) all of them are as simple as depositing a cheque in your ban account. You just need to pick which combination works for you.

While waiting for the next part, leave a comment below to let me know what you do to avoid hidden exchange fees!