Three investing enemies
“The investor’s chief problem – and even his worst enemy – is likely to be himself.”
-Benjamin Graham, Value Investor, Mentor to Warren Buffett
Contrary to what many institutions might have you believe, investing in sub-par performing investment products is not an investor’s chief problem to overcome. Sure, investment returns matter over time but they don’t matter nearly as much as bad behaviour. An impatient investor can destroy an investment portfolio. It is my experience that successful investing is not about getting everything right, it’s about doing the right things more often than not – and that means letting your assets do all the work over time. Furthermore, an investor is not a trader in my book. An investor by definition has a vested interest in their holdings and sticks with them through the good times and the bad. In fact, an investor does not chase performance but instead looks for opportunities to buy more assets at modest prices or when re-balancing is due.
“The power to tax is the power to destroy.”
-John Marshall, former Chief Justice of United States, founder of U.S. Constitutional Law
Who here enjoys paying taxes? Anyone? Any hands? Just what I thought – nobody enjoys paying taxes. Paying income taxes, property taxes and getting dinged on our value added tax (GST) at the cash register are things we cannot avoid. However, what you might not know is Canadian investment income is taxed at favourable rates, certainly when compared to employment income. So if you learn to put certain securities in certain accounts, you can reduce your tax burden. For example, you might already know investment products in a registered retirement savings plan (RRSP) grows tax-deferred but securities in a tax free savings account (TFSA) grows completely tax-free. What you might not know is Canadian dividend income is taxed favourably. Also, high-growth, non-dividend paying stocks can be excellent investments to hold in taxable accounts since capital gains receive better tax treatment than employment income. A good rule of thumb to remember: any investment that is taxed at a rate lower than your employment income is a candidate to be held outside your registered accounts. For investments that don’t fit that criteria like bonds, it’s probably best to keep them in an RRSP, registered retirement income fund (RRIF) or a tax-free savings account (TFSA). Putting your assets in their proper location can make you a wealthier investor.
“The money you spend on money management fees is the money you never keep for yourself.”
-My Own Advisor, DIY Investor
Plain and simple, paying high money management fees are a major drag on returns. If you don’t want to take my word for it, read this article on WhereDoesAllMyMoneyGo:
“…a 2.69% MER mutual fund consumed 92.53% of your original contribution over 25 years and left you with 49.42% less money due to the effect of fees.”
Want some more proof? Take the Rule of 40 challenge: take the number 40, divide it by your mutual fund’s Management Expense Ratio (MER) and the result is the number of years it takes for money management fees to eat 1/3 of your investment. Yes, you read that correctly.
Example: Your high priced TD Canadian Equity mutual fund has an MER of 2.18%. So, 40 / 2.18 means in 18 years plus a few months, about 1/3 of your investment value will be lost to fees.
Instead of worrying about investing forces of nature that are well beyond your mere mortal powers of control, forces such as stock market returns, inflation and interest rates, focus on things you can control. My advice and my own practice seeks to keep my investing behaviour aligned with my financial plan, take advantage of the tax laws where I can and pay if I absolutely must some money management fees but not a penny more.
Any more investing enemies I should call out? Which one above is the biggest villain to your portfolio?
Agree with all these investing enemies. I think for the majority of people the own worst enemy is the big one. It’s constantly spouted to buy low and sell high but in actuality people do the exact opposite. I used to get in my own way alot but trying to trade too often. I’ve found now that I stick with dividend growth investing and hold for the long term I have been doing a lot better with my investments.
I know I struggle with the behaviour one as well…but I’m working on it. Agreed, the dividend investing is helping me too; because I think dividends are tangible, you can actually see the money coming in (vs. just capital appreciation; ups and downs).
Thanks for the comment!
Well said! I’m definitely my own worst enemy! I’ve a well established investment process that I follow 80% of the time. For somewhat reason, I still like to “gamble” on a stock each year. I’ve burnt my return in 2011 and 2012 because of those gamble and I still did it in 2013 (AAPL)…. I hope I’ll be right this time!
Ha, well, I recall you are doing very well…so you must be doing something right!
Trying to find that golden nugget is very tempting, isn’t it?? 🙂
I used to be my own worst enemy. After I became involved in dividend growth investing and started sticking to an actual plan, things got a lot better. Imagine that… Taxes are now my biggest enemy. It’s so sad seeing how much of my paycheck gets ripped away every two weeks. I would love to opt out of social security and get 12.4% of my total compensation back. Even the crappiest most fee loaded index fund can produce better returns.
Thanks for your comment. I just stopped by your site BTW!
I also find now I’ve been dividend investing for a few years, my financial plan has gotten better as well.
I need to become more tax efficient, so between bad behaviour now and then and tax optimization, I could still use some work.