It Must Be Good. It's called an ETF.

Every generation suffers from its own brand of cognitive dissonance regarding investing: Boomers pray at the altar of Canadian banks, Millennials shun any investment without “ETF” in its name, and Zoomers (Gen Z) only invest in what Reddit says will go to the moon.^[i]

My favourite part of the CFA curriculum was learning to work through cognitive errors and emotional biases. Cognitive errors can be corrected, but emotional biases are tougher because they’re driven by feelings. Here are two quick examples:

Confirmation bias is a cognitive error. It’s when someone only reads articles or listen to podcasts that agree with them and ignores anything that says otherwise.

I’m told in law school you get cured of confirmation bias in moot court. What’s moot court? Students must research and prepare arguments for both sides, and they don’t know which side they’ll be on until a few minutes before the moot court. That is how you crush confirmation bias.

Endowment effect is an emotional bias. It’s when someone values something more than it’s worth just because they own it. Think of family heirlooms here. There is no logic whatsoever, just attachment. The wristwatch that was your great-grandfather’s? No one will pay you extra just because it belonged to him. Only you see that added value.

Having seen how biases can mess with our heads, let’s look at how they show up in investment behaviour. I’ll save the Boomers and Zoomers for later, but today I’m picking on my own cohort: Millennials.

“If it doesn’t say ETF, it’s a horrible investment”

I am a geriatric Millennial. We can thank our economics and finance professors who told us: “you can’t beat the market, so just own low-cost, broad-market ETFs. Here’s the evidence.” And the evidence was and continues to be overwhelming.

The most important part of the evidence, though, is the thing I never stop talking about: that you must buy low-cost, broad-market ETFs and never sell them. At least not until you need income in retirement.

You don’t tinker with them or think, “Maybe I’ll sell some U.S. and buy Canadian because of [insert useless prediction].” You buy the ETF and never sell it.

That’s the first part of it. The second part is remembering that not all ETFs are created equal. Some are great. Some are not-so-great. For example, I use Dimensional Funds. In America, you can invest in Dimensional Funds in ETF form. In Canada, you can only own them in mutual fund form.

But because they happen to be structured as mutual funds in Canada, many Millennials think they’re garbage. Yet those same Millennials happily buy concentrated, high-fee, sector or thematic ETFs that look nothing like the index funds they were told to buy.^[ii]

Finally, there’s tax. I’m going to keep this generalized. If you’re interested in the minutiae, give me a shout. In non-registered accounts, Canadian-listed ETFs lack the tax advantages of U.S.-listed ones.