Most people suck at investing. The banks know this. Mutual fund salesguys depend on it. Insurance hawkers, too. Plus the cowboys who flog gold and silver. The vast majority of us make two one of two mistakes. We get greedy and end up taking huge risks. Or we get scared and bury money in dead-end GICs. Either way, we lose.
Of course, most of the people you know gave up trying to figure any of this out long ago. So they just buy real estate. They put almost all their wealth in one asset on one street, over which they have no control. Like the trapped 70-year-old couple in a semi in Toronto’s Beach area. Ordinarily the property would be worth a million bucks, but it was valueless since nobody would buy half a house with the other side occupied by a cat hoarder, and the lawn a sea of flies and feline surprises.
But we yak about real estate too much here. Let’s focus on making money grow. I’ll return to this theme more often in the future. Right now here are ten little rules to get us started.
Invest, don’t gamble. Mostly this means don’t buy individual stocks unless you have a mess of money, like seven figures. Stock markets are volatile, scary places. Companies lie to investors, even though rules are in place to ensure they don’t. Prices can fluctuate enough in one day to erase a year’s worth of dividends. Junior, speculative issues – especially in the energy sector – are investor death traps. And there’s no way the little guy can compete with professional traders or high-frequency computer transactions. If you want to gamble, spend two bucks on the lottery, or drive on the 401.
Diversify, always. So it’s okay to have exposure to stock markets, but get it through baskets of equities. ETFs are the best – exchange-traded funds. They’re like mutual funds, but since there’s no fund manager who likes Porsches, there’s no big management fee. They also trade on the markets, so they are more liquid, but still pass through dividends. You can buy all the large-cap companies in Canada or the US, for example, through a single ETF.
Don’t be patriotic. Diversifying to avoid risk and earn more consistent returns also means not owning too many maple assets. Canada accounts for about 4% of the world’s financial markets, and yet 70% of investors here have nothing but Canadian assets. Very dumb. The Toronto market is up 5% so far this year while the S&P 500 has gained 20%, Europe is ahead 14% and Japanese stocks have added 44%. So Canadian stuff, at best, should be only a third of the growth part of your portfolio.
Be balanced. This is my favourite word. The true key to investing success is to own a lot of asset classes all the time, and to do so with the correct weighting and balance. One size does not fit all, but a balance of 40% fixed income (safe stuff) and 60% growth has proven itself, in good markets and disasters. This portfolio has returned about an average of 7% over the last decade, even with the 2008-9 melt. The safe stuff includes a blend of corporate, government, high-yield and real-return bonds, plus preferred shares, while on the growth side are REITs and ETFs in Canadian, US and international assets as well as alternative assets such as a completion ETF or tactical fund.
Don’t just balance, but rebalance. This is what almost all amateur investors never do. Because all assets are changing values all the time, the careful weightings in a balanced portfolio (like 6% REITS, 18% preferreds, 5% emerging markets, 17% US equity etc.) get out of whack. This year American stocks have done well, for example, so what was designed to be 17% of the portfolio might have blossomed to 21%. So, rebalance. Take profits, bring the weighting back to its optimal point and distribute the gains among the under-performing assets. Yup, it runs counter to your intuition, which is exactly why it makes sense.
Don’t chase prices. Because we’re human, and care more about Lindsay Lohan than Dow Jones, we crave what everyone else does. That’s why we buy houses when the market is booming and prices soaring, or lust for gold bars and Apple shares when they’re at historic highs. So when one part of your portfolio does well, the temptation is to punt the losers and buy more of it. Bad idea. Next year conditions could be entirely different, and you’d own a mess of the wrong thing.
Don’t sell low. That sounds so obvious you’d wonder why I bother listing it. But the temptation to turn paper losses into real ones, propelled by irrational fear, is overwhelming for most people. For example, Eve and Jack bought a bunch of preferred bank shares with a fixed 5.2% dividend last Spring for long-term income, and then freaked this past summer when rate jitters sent prices down 15%. They bailed, afraid the preferreds would continue to lose value. So, they turned an illusory loss into a real one. And now preferreds have started to recover (of course). Meanwhile they could have been collecting 5.2% and the dividend tax credit. The mama of all bad times to sell? That was March of 2009 – when the selling turned into an avalanche. Time to buy.
Stay liquid. Don’t stick all your net worth into real estate. Don’t buy a five-year, non-redeemable GIC. Don’t fall for some bank-created, structured product that locks you in for years. Don’t get sucked into a mutual with a deferred sales charge, and end up in a fund prison.
Start with a TFSA. This is a gift from that peckerette, F, who for once in his life listened to me. You’re allowed up to $25,500 in there now ($51,000 with your spouse, and add another twenty-five grand for each kid over 18), and all growth is untaxed. That means it is a crime against nature to put TFSA money in a savings account, a GIC or a bond. This is where the higher-growth, more volatile parts of your portfolio go. The bonds should migrate to an RRSP, while stuff that churns out dividends belongs in a non-registered account.
Watch the fees. They can kill you. The worst are toxic MERs on mutual funds, especially equity funds. So, avoid them by using ETFs. If you have an advisor (good move for anyone investing $100,000 or more), don’t get a guy who collects commissions and tells you his service is free. It ain’t. It all comes right out of your after-tax returns. Better to find a fee-based advisor charging 1% or less, which is deductible from taxes.
And above all, for the love of God, take no advice from a blog.