I was inspired by this article from Michael James on Money recently that answered a bunch of questions investors simply don’t ask themselves, listed on Ben Carlson’s site A Wealth of Common Sense. Given Michael is a successful index investor and my investing approach is different from his I thought I’d take a stab at answering Ben’s questions and see what’s different and by how much. Ben’s questions are in bold font, my answers follow. Please hang with this post, it’s longer than most.
What if I’m wrong?
I’m quite confident in my indexed product selections. I’m also confident in my dividend stock selections for passive income.
What are this person’s incentives for giving me advice?
I ignore market forecasters although I do find them interesting.
What are the all-in costs for my portfolio?
The blended MERs for all the indexed products we own are about 0.12% per year. My commission costs are about $200 per year to buy more ETF units or dividend paying stocks throughout the year.
What’s my reason for making this purchase or sale?
I find rebalancing challenging with my hybrid approach to investing, I won’t lie, indexing would be easier. When new money is available, I seek out more purchases in companies to match the sector allocation of the TSX Composite Index striving for ~40% financials, 25% energy, 15% materials and industrials and 20% from other sectors like telecommunications.
Maybe I should give myself a few days before making this change to my portfolio?
I don’t feel l need any cooling off period for my investments.
What’s my time horizon on this investment?
Decades. I plan to invest money in indexed products and stocks for as long as I live.
Does this strategy fit my personality or is it a case of a square peg in a round hole?
Although I intend to index invest more as I get older (and have already in 2015) I feel quite comfortable with my strategy.
When will I sell this investment?
My intended holding period is decades for any investment.
Have I looked at both sides of this trade?
I am not concerned about the short term consequences for any purchase.
How will I react if the markets don’t cooperate with my thesis?
My intended holding period is decades for any investment. Personally, I like it when the markets correct. It’s like shopping when things are on sale.
Am I saving enough money?
I hope so. Our mortgage payments and lump sum payments take up a large portion of our after-tax pay. This sucks. Beyond our mortgage payments we’re trying to save 20% of our after-tax income every year.
Am I blaming others for this mistake instead of taking responsibility for my own actions?
I don’t blame others for things I am responsible for.
How much will this change in my portfolio really affect my performance?
Using indexing products, I can largely predict the long term returns for my portfolio. Given the dividend histories of many companies I own, I can largely predict the passive income I may expect to earn in any given year.
What is my asset allocation including all of my investments?
My long term allocation goals are 60% equities, 10% REITs and 30% bonds/fixed income. I consider my workplace pension my fixed income.
What’s my edge in these competitive markets?
I’m not sure I have one. Indexing provides market returns less miniscule money management fees. My Canadian stocks are largely tracking the returns of the TSX Composite Index for the last five years.
What does the party on the other side of this trade know that I don’t?
I know there are tens of millions of investors who are smarter than I am so I figure buy holding assets long term I don’t need to play the trading game.
Am I listening to the right sources when taking financial advice?
This is hard to answer because I’m biased. I suppose if we’re not meeting our financial goals then our know my plan is failing.
What’s my maximum pain threshold for losing money?
I don’t know actually. I know with the recent oil and gas decline I’m not worried. I’m buying stocks instead.
Am I looking at the market value of my portfolio too often?
Do I understand the risks and expected returns for this asset?
Long-term I’m banking on 3-4% real return for my portfolio. The yield on my investments (indexed products and stocks) is currently about 4%. My hope is capital appreciation for my investments will match inflation, give or take 2-4%.
Could I explain my investment strategy in a 30 second elevator pitch?
Some “core” using indexed ETFs and some “explore” using Canadian and U.S. dividend paying stocks. I try to reinvest all distributions and dividends paid every month and quarter.
Do I have a reasonable time frame in mind for my portfolio?
As long as I live.
What is the underlying liquidity in this investment vehicle?
The popular ETFs I own and the stocks I own I would think are pretty liquid.
What are the tax complications?
I put only Canadian dividend paying stocks in my non-registered account for favourable tax treatment.
I don’t have any tax complications for investments inside our TFSAs.
I’ll have to pay taxes (eventually) on money withdrawn from our RRSPs.
Am I being patient or just stubborn?
If I buy and hold my investments then maybe both?
Am I diversified enough?
Yes. I own thousands of stocks using the indexed products I own. I own 25+ Canadian stocks from a variety of sectors. I am very fortunate to contribute to a workplace pension.
What are the alternatives to this investment?
I suppose just to index invest everything 100%?
Will my assets cover my future liabilities?
If I work until I’m 65, absolutely. However we want to retire earlier then no so we need to save and protect our human capital.
Do I understand the risks involved with this strategy?
I’m not sure my indexing strategy has major risks that are not well-documented. In terms of owning many individual stocks, yes, I am aware these companies might not always achieve market returns nor are their dividends guaranteed.
What’s my investment philosophy?
Already mentioned above.
Am I trying too hard?
I don’t agonize over my portfolio so I guess the answer is “no”?
Does this person offering advice on TV have the same time horizon as I do?
I don’t watch much TV other than sports (e.g., golf, hockey, and football) a handful of TV shows and movies.
Am I anchoring to current or past price points?
No. I buy new investments if we have money after aggressively killing mortgage debt every two weeks.
Are this portfolio manager’s past results too good to be true?
I don’t invest with portfolio managers.
Am I allowing my confirmation bias to cloud my judgement?
I still have some biases related to the stocks I own, but that’s about it.
Am I the sucker here?
Buying and holding indexed ETFs? Buying and holding dividend stocks that have paid dividends and provided capital appreciation for decades? I don’t think so but maybe I am.
Am I chasing past performance?
For the most part, yes, I am relying on the past performance of the stock market to provide similar returns in the future. If the stock market does not continue to grow somehow long term I suspect all investors including me are doomed.
Am I imagining that past market scenarios were easier than they really were at the time?
No. There is always some new financial crisis around the corner.
Is this data important or just interesting?
I don’t think any short term data is that useful, maybe for day traders it is.
Am I working with a marketing firm or an investment firm?
How did I react during past periods of market turmoil?
I bought stocks coming out of the 2008-2009 financial crisis. I continue to buy stocks during this oil downturn.
Do I really understand my appetite for risk?
I’ve never really tried to quantify it.
Am I practicing first or second level thinking?
If second-level thinking about thinking for myself, being more objective and avoiding following the herd, I am getting better at this.
Does this person have my best interests in mind?
I would like to think most people have my best interests in mind but when it comes to the financial industry I’ve learned you’re largely prey for a massive marketing predator.
Can I stick with my process when things don’t go as planned in the future?
I think so but I have no idea what the future holds – a plan is good for a point in time – the process of planning is far more important to my wife and I.
Am I anchoring to a bad investment or staying disciplined to a good process?
There is some anchoring in my portfolio, I continue to hold a few stocks that have dropped in price, and I’m buying more of them every quarter.
What do you make of my answers? Although the list of questions is long, take on the questions yourself and see how you do!