Beating the index sound like fiction? It’s a fact and you might be able to do it just like Ross Grant did. Ross Grant is an engineer by trade and like most engineers he likes figuring things out. Based on his book entitled Destination: Early Financial Independence it looks like Ross figured out early retirement fairly well.
I had a chance recently to talk to Ross about his book, his writing gig at Canadian MoneySaver, the investment approach “Beating the TSX” and other financial subjects.
Ross, thanks for this and good to finally talk.
Thanks Mark for your interest in the investment strategy I use. I hope your readers will pick up a few tips our discussion that may help them reach their financial goals sooner.
Ross, I have a copy of your book Destination Early Financial Independence – How You Can Get There & Manage Your Investments Throughout the Journey and I thought the concept (a series of short letters from father to daughter) was great. Could you tell readers a bit more about the book, your inspiration for it and some of the key chapters?
When I was 22 I started my first job after graduating as an Electrical Engineer. After a particularly tough day at work I came home and decided to figure out what it would take to exit the work force. After 2 hours on the computer I came up with an answer. I changed jobs shortly after that but still kept working towards the financial independence goal. My wife and I retired 21 years later at age 43, having achieved financial independence. Seven years later I decided that I needed to capture how we had accomplished this so that my daughters would be able to benefit from our experience. I wrote this book for them, but decided to put a bit of extra effort into it for so others might benefit as well.
I was excited to capture the simple process that we had followed over the years and share it with others so they might enjoy similar success. I have distilled down many years of financial reading and experience into the important steps we took.
Often when I meet someone that is interested in financial education, the first thing they want to know is what stocks to buy. This is actually the last question they should be asking. I usually ask them if they know how much they need to earn to pay for their current living expenses. They usually don’t know. The first third of the book, “Early Life Lessons”, covers the important topics related to financial management. Trying to reach financial independence without basic financial management skills is like trying to win a hockey game without knowing how to skate very well.
The next third of the book, “Investment Strategy”, covers Beating the TSX (BTSX). This interesting section describes an easy to apply process that eliminates the investment expense of mutual fund management fees and provides a very good long term return with minimal time and effort. I spend 8 hours per year on the process and have made and average of 11.2% per year over the last 15 years.
The last chapters in the book cover “Financial Independence”. I discuss how much you need to be financially independent and how we actually manage our finances. Overall I think I have captured the strategies that I hope my children and others will also benefit from to achieve their goals.
Let’s talk about “Beating the TSX”. Can you share concept?
The BTSX was developed by David Stanley and he obtained a 12.47% return over 28 years. He asked me to carry on sharing the process and results in the Canadian MoneySaver. Here is a very brief explanation of this strategy. BTSX involves ranking the stocks in the TSX 60 from highest to lowest dividend yields and then investing equally in the top ten. There are some former income trust stocks that are excluded, so make sure you are familiar with all the details of the process. The ranking process is completed annually to generate an updated list and changes to the stock holdings are then made.
Here are the benefits of the process:
- The MER (Management Expense Ratio) paid on the BTSX portfolio is close to zero. An average MER of a Canadian actively managed mutual fund is in the range of 2 to 2.5%. By managing the portfolio yourself you avoid this cost and get to keep more in your pocket.
- The dividend income that is generated is what we use to live on. There is no need to sell capital to provide income. Retirement income management is very simple.
- The dividends have preferential tax treatment, so we pay low taxes compared to other types of income.
- Many of the companies are continually raising their dividends. So far, the average yearly increases are equal to or greater than inflation. Thus, your retirement income has the potential to keep up with inflation, or perhaps even grow faster.
- Deciding which stocks to sell and what to replace them with is made easy with the annual review process.
- The amount of time I spend annually to manage the BTSX stocks is low, making it very manageable in a busy lifestyle.
What risks come with “Beating the TSX” approach?
BTSX comes with all of the risks of investing in stocks that we are familiar with. A particular stock or stocks in the portfolio of 10 may not do well or may even cut its dividend. The benefit of buying a bucket of 10 stocks with equal investments in each is that it forces the investor to diversify and thus help to reduce risks. I always recommend that followers of the BTSX process be comfortable with any stocks in the list that they purchase. If there is one particular stock that they are uncomfortable with, they should skip it and pick the next one down on the list. Remember, this investment strategy is not supposed to keep you up at night.
I get the approach but why not buy and hold the top stocks in the TSX (i.e., Canadian banks, telcos, utilities and pipeline companies), stop selling TSX stocks every year as part of the “Beating the TSX” approach?
In order to pick the “top” stocks you still need some kind of criteria that defines what a “top” stock is. Then the criteria must be monitored over time to see if you are still holding on to the top stocks. A different approach such as you suggested, could perform well but the question of whether it is better or worse than BTSX could only be proven with some back testing and some ongoing comparison of the two methodologies.
I am convinced that one of the key benefits of the BTSX process is that it helps move the investor out of the stocks that have done well and purchase other stocks that are struggling somewhat. It forces the buy low, sell high action that is needed to produce returns that are above the market average. Without the changes in the BTSX portfolio the return would likely approach the overall average return of the market. If you were happy with the market return, the much simpler alternative is to invest in a market index ETF like XIU.
I’m a hybrid investor – I own dividend paying stocks for increasing passive income and I own a few broad market, low cost Exchange Traded Funds (ETFs) for diversification. What do you make of my investing approach for an early retirement?
It sounds like we have a similar mix of investment choices so I would have to say your approach is fine. The important question is how does your long term return of your dividend paying stocks compare to the BTSX return and how much time are you spending making your investment choices. If your returns are the same or better than BTSX and you are not spending too much time in front of a computer screen, then you are doing well. I find that most people do not keep track of their ongoing portfolio returns and thus are unable to compare with other alternatives. The first step is to make sure you have the data on your annual returns.
The second suggestion I have for you is to create a summary sheet of the dividend income you are receiving from all your investments. This is the income that you will be using to live off once you are no longer working. If you focus on this growing income, rather than the fluctuating market prices of your stocks, you will be more relaxed day to day and will also make better investment choices. You will look at a falling market as a great opportunity to increase your dividend income at a lower cost than in the previous month or year. A falling market will be a good opportunity (to catch a sale) rather than something to lose sleep over.
Back to you Ross – are you still using the “Beating the TSX”? What investing success have you had? Can you share some of your current investments?
Yes, BTSX is performing as I had hoped. Here are the results as per the end of 2015. It is beating the index by 48%.
|Beating the TSX returns vs. the index (%)|
2000 – 2015
|Avg Yr. Total Return (%)||11.20%||7.6%|
Here is the current BTSX list of stocks for 2016: NA, CM, BNS, SJR.B, BCE, PWF, ENB, TRP, T, BMO. The results of 2016 will appear in the Canadian MoneySaver in early 2017.
What’s your take on index investing?
I think index investing is a good choice for investors that have started with mutual funds and want to become more involved in the management of their portfolios. Some investors may find that index investing is as complicated as they want to get. Over the long term, the majority of mutual funds struggle to beat the returns of our major indexes.
I started with XIU’s and gradually built up a portfolio of dividend stocks. I never sold any of the XIU’s and my average purchase price is half of the current market value. As well, the dividend income generated by the XIU’s has grown to twice the original amount. From the previous chart we can tell that the return has been 7.6% over the last 15 years which is quite good for a buy and hold investment.
I will continue to hold the XIU’s as it is nice to have a winning investment in the years that the index outperforms the BTSX process.
How’s the writing gig at Canadian MoneySaver? Any advice for an aspiring writer like myself?
Writing at CMS has been a great experience. I have enjoyed sharing my investment ideas and results with readers. I don’t think you will find it any different than the writing you have done on your blog.
What are your financial plans for the future?
I plan on continuing to follow the BTSX process. I will be monitoring the results and sharing them with readers. Hopefully the future results will be similar to historical results, but that is not a given.
Any final words of wisdom to share with new investors?
New investors need to increase their financial knowledge and investing experience to move forward to meeting their financial goals. They need to ask themselves 3 things before deciding if they want to become a do it yourself investor.
- Do they have the interest in doing their own investing?
- Do they have the time it will take to become educated on the topic?
- Do they have or are they willing to learn the skills required. Such skills would be math, organizational, and computer skills such as the ability to manage excel spread sheets.
If your answer to all of these questions is yes, then you can get started. Otherwise it might be best to obtain professional support until you are ready to try it on your own. For those of you who are up to the challenge, the rewards can be well worth the effort. Best of luck!
Thanks for this Ross and congratulations on your early financial independence.
Readers, what’s your take on the BTSX strategy? What questions do you have for Ross?