How I used to sabotage my portfolio

I spend a lot of time on My Own Advisor sharing what’s working in my financial plan and how incremental money management changes are moving us towards financial freedom every month.

As part of our plan we make monthly savings automatic, we invest in dividend paying stocks and indexed products for the long-term, and we diligently kill off mortgage debt using lump sum payments every month.  We figure with this plan we should be financially free in less than 15 years.

On this seemingly blissful journey however the current road has paved over many financial mistakes.

Thinking about mistakes and failing to make changes from them always reminds me of this quote:

Insanity: doing the same thing over and over again and expecting different results – Albert Einstein

By learning lessons and making some changes hopefully we experience major financial mistakes only once.  To help you avoid some of the money management mishaps I’ve made over the years today’s post highlights two ways I used to sabotage my portfolio – but not anymore.

Investing in high-priced mutual fund products

In my 20s, I invested in mutual funds that charged money management fees close to 2%.  Back then I simply didn’t know how much those fund fees would eat into my investment returns.  On top of that, I had no idea that most mutual fund managers have no hope of beating their benchmark index, even after a few years let alone after many years.  I don’t invest in mutual funds anymore for these reasons:

  • I can (and do) get market-like returns buying and holding low-cost equity index funds like these ones.
  • Along with indexing part of our plan is owning established dividend paying stocks for passive income. There’s really no secret formula to what we own.  I tend to own many of the same stocks the big bank mutual funds own directly.
  • By owning indexing products AND a number of individual dividend paying stocks where I can reinvest dividends paid every month and quarter I pay minimal money management fees each year. This means more money stays in my pocket and that money is continually being reinvested too.

Too much tinkering and chasing performance

As a novice investor I was very guilty of chasing the hottest products.  In my 20s I not only paid sizeable money management fees (above) for my mutual funds but I also chased the performance of those funds.  This was really a double-whammy.  We’ve all heard the investing mantra to buy low and sell high but I was really doing the opposite of this strategy – buying hot and selling what’s not.

I remember I did so because I found it difficult to read and hear stories of other investors getting wealthy off some iron-hot asset class every few months – unfortunately the one I wasn’t holding at the time.  What I realized over time is if you chase performance there is a good chance you’ll own what is overvalued.  I learned there is a better strategy…it’s better to buy assets when they are out of favour.  This doesn’t mean speculating as much as it means rebalancing your portfolio.

Over the last few years I’ve learned to train my investing brain.  I’m inclined to make new purchases in established dividend paying stocks when they are out of favour – when their market prices have fallen and when the talking heads are beating these companies up.  A recent example is with oil and gas stocks.  Outside of the DRIPs I run with many companies including stocks in this sector I’m looking to buy more of them with lump sum purchases as prices continue to sag.

I’ve also chosen to rebalance my stock portfolio by buying new assets to largely align with the sector breakdown of the TSX Composite Index.  Take the ETF XIC as an example of that.  The TSX Index and XIC has a breakdown of roughly 35% financials (think banks and life insurance companies), 20% energy (think Enbridge, Suncor, Canadian Natural Resources and more) and to a lesser extent materials, industrials and telecommunications companies.  This helps me earn market-like returns.  Accepting what the market provides and celebrating falling prices is not necessary an easy thing to wrap your head around but I think you should give it a try.

In the end, I believe investors will be successful if they can do some of the following things:

1.keep a modest and consistent savings rate,

2.keep their fees low,

3.diversify across sectors, companies and countries as much as possible, and

4.celebrate falling prices as a reason to buy.

Paying high fees for lacklustre fund performance and chasing hot products are two sure-fire ways to sabatoge your portfolio.  Instead, consider buying and holding lower cost financial products and simply staying away from your portfolio as much as possible other than to buy underperforming assets when prices bottom out.

With these lessons learned I’ve come to realize investing might be as exciting as doing laundry. It doesn’t mean this process doesn’t work incredibly well.

Any lessons learned you wish to share?  What other ways do investors sabatoge their portfolio?

Mark Seed is the founder and editor of My Own Advisor. As my own financial advisor, I've grown our portfolio from $100,000 to well over $500,000. Our goal is to own a $1 million investment portfolio for an early retirement. Come follow my saving and investing journey by subscribing to my site.

20 Responses to "How I used to sabotage my portfolio"

  1. Been there done that on paying MER’s as high as 2.5% on mutual funds and chased last years winners for numerous funds or various sectors. I also have been guilty of not doing enough research for some funds or individual stocks after hearing or reading tips in years gone by.

    Fortunately I have largely been able to avoid this kind of self sabotage for about 60% of the most recent time I’ve been investing- around 34 years total.
    I finally realized after years of under performing the market that equity indexing was the best choice for me, with good global diversification and a bias on low volatility, along with a good smattering of FI, now that we’re retired and capital preservation is more important to us.

    I absolutely agree with your 4 points. I’ll add a 5th that I think is equally important and beneficial and might have been my wisest investment decision of all.

    5. Start saving and investing early even if amounts are small. Time is perhaps your biggest friend when it comes to growing your assets.

    Reply
    1. I’ve also learned the value of equity indexing – it makes sense on so many levels and we’ve been doing this more as the years have rolled on. I think as we get older more fixed income is in the cards for us as well, likely 10-15 years from now.

      I like your 5th point!

      Reply
  2. Thank you Mark for the great article. Healthy investing is like healthy eating. One may know what is needed to be financially healthy but we keep finding ways to depart from sound investing just as we tend to buy unhealthy food products. Hot tips and so called bargains tend to lead us astray from our plan as you pointed out.

    Thanks for the needed reminder. Almost all my 2015 individual stock purchases are lagging the ETFs that I hold as my core portfolio. Most are in the energy and mining sector… but who knows a few years from now these choices my look brilliant. Now I am just losing a bit of capital (paper loss) on these purchases. Luckily, they are all Canadian dividend paying companies so I still get real money added to my investment account.

    Reply
    1. Great point about healthy investing. Hot tips are largely like potato chips. I like them, they taste good but the tips/chips are not good for you.

      A paper loss is nothing and although I’m down a bit on my energy stocks I intend to buy more this summer. I figure this is a great buying time. 🙂

      Reply
  3. You should have seen me during my first foray into self directed investing in 2007 and 2008 when the markets crashed. I was trying to time the market with ETFs and leveraged ETFs during the wild swings they were having because I noticed a pattern of quite a large upward bounce after every big drop. I’d wait for a big drop, try to catch the falling knife, buy in just before the bounce, and then sell after the bounce. Surprisingly it actually worked reasonably well and I made some money for a few weeks but then I eventually woke up and stopped doing it before I made a big mistakes.

    I was playing with stop losses and other things to partially protect myself from losing everything, but I really didn’t know what I was doing. Even idiocy and can turn out ok if you get lucky I guess. I didn’t get lucky with my insane yield chasing of Yellow Pages though. It was a good lesson to not pick stocks and to mostly stick with index investing though.

    Live and learn!

    Reply
  4. I finally got my son to invest his money, hopefully the best way for him. We worked out a diverse allocation using ETFs and Questrade, which doesn’t charge any fees for buying ETFs. He had $100,000 and plans to leave it there for a long time, he thinks retirement, but I think he might want to use it if/when he buys a house. Every year he will move the allowable amount into his TFSA and re-balance once or twice a year.

    I’ve been after him to do this for a couple of years, he is now 26 and is a student again, but can live on the stipend and scholarship they give him.

    I am not one who much wants to buy individual stocks. But last year I purchased an expensive medical device for my daughter, which also has expensive ongoing costs. It can cost $5000 per year and only the lucky ones have medical insurance that covers it. Within a week we loved this device so much I thought I should invest in the company, I would only do this for something that I knew really well. In just over a year the stock has gone from $34 to $81 and now I don’t know if I should sell some of it or not. The gain will pay for five years of buying the product, lol. Its a hard decision to know whether to sell or not.

    Reply
    1. Impressive, a student in his 20s with $100,000 to invest. I think maxing out the TFSA is an excellent idea.

      True enough when it comes to stocks. We typically buy and never sell so when it comes to being unsure about any stock we simply sleep on it for a few weeks or months and just put the money into an indexed ETF.

      Reply
  5. Another lesson I’ve learnt is to try and focus on the savings rate which is something I can control. No one knows what the market will do in the future (including myself) so there’s really no point in trying to guess something you can’t control. My lesson – when you can’t control the markets, focus on your rate of savings

    Reply
    1. A very good thing to focus on Dan, your savings rate, and what you can control. Taxes to a degree can be focused on as well. Inflation, rates of return, out of your control.

      Reply
  6. Great article Mark! “Too much tinkering and chasing performance” I’m guilty of that. I need to relax and just stick with the plan ( Couch Potato ETF RRSP, dividend stocks TFSA/unregistered)
    Cheers
    Joe

    Reply
    1. I think that’s a great plan Joe and largely what I do: RRSP = U.S. indexed ETFs and U.S. stocks; then TFSA + Non-Registered = CDN dividend paying stocks and REITs. Thanks for reading!

      Reply
  7. Surely did some of the “Too much tinkering and chasing performance” when I started. Not all my moves were bad, fortunately, since I managed to buy my first house with money I gained from the market. Still, my investment strategy is a lot more balanced and constant now, and it surely pays off in the long run.

    Reply
    1. Well, I probably still tinker too much since I’m a dividend investor and not a 100% indexer. At some point I’ll index more and spend less time on the portfolio – it just makes too much sense not to index invest.

      Reply
  8. Sounds like I might have been sabotaging my portfolio as well. I started investing in 2012 and naturally thought I was doing a great job because my portfolio was doing quite well, when in actuality my cat could have probably made a 20% return that year. Things aren’t so hot this year as we all know, and it has really gotten me thinking about how I should really be strategizing. Great read!

    Reply
    1. Correct, the last few years my cat could have done well, as well! It will be interesting to see how investors invest as times get tougher going forward; i.e., potentially less yield, low-interest rates for decades.

      Reply
  9. Not directly related to this post (or maybe it is), BUT … what are your views on Canadians continuing to buy foreign stocks, even while the Canadian dollar is so low?

    Reply
    1. It’s certainly tough when the dollar is tanking…so I’m simply saving up more money now for purchases in the future. Also, you can hold an indexed CDN-listed ETF like VUN to substitute for VTI.

      Reply

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