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 sabotage their portfolio?