We’ve all heard stories of people who, with some combination of skill and luck, hit it big on real estate or cryptocurrency or pot stocks. Depending on your tolerance for risk, you can give those things a shot too. But over the long run, three of the most reliable and rewarding investment tips are actually quite easy for you to replicate – no skill or luck required.
Tip #1: Invest again and again and…
I laugh when I hear a hockey coach or player say the reason they lost is that they didn’t put the puck in the net. It seems a little too obvious. But I must say, the number one reason people don’t have bigger, more valuable investment portfolios is because they didn’t put the money into the account.
This is understandable, especially when you are new to investing. Even if you feel quite confident about what to invest in, there’s a certain “why even bother?” feeling when you’re starting out with $100.
But the first investment tip I want to share with you is this: invest that $100. Do it immediately. Then do it again next month and the month after that. Keep doing it every month. Someday, when you can afford it, make it $150 per month then $200 per month. And then just keep going like that for the rest of your life. This consistency is a fundamental key to success, and for reasons that go beyond the mere obvious.
The obvious part is that each of those small investments gets stacked on top of the previous ones, and all of these investments earn returns, and those returns earn more returns, and the whole thing turns into a virtuous circle of wealth creation. The more you put in, the more it grows, and the richer you get over time.
The not-so-obvious strength of this strategy is how it can actually enhance your returns. Most investors plow money into the market when times are good, and run scared when the market takes a dip. Since none of these investors have a crystal ball, they usually time these moves incorrectly and do worse than if they had not even bothered trying.
Those who invest a set amount every month are buying into the market no matter what’s happening – during the best of times and the worst of times. You’ll pay a little more when the market is hot and a little less when it is cool, but on average, you’ll do better than those who think they can outsmart the market.
Tip #2: Get your money’s worth
I ask people how much they pay in investment fees, and most have no idea. This is not really surprising, because if you buy mutual funds at the bank or from a financial advisor, the fees are deducted from your account before you even see it.
To give you a sense of how much these fees matter, a typical Canadian stock market mutual fund can charge roughly 2.5% per year. Meanwhile, the Canadian stock market’s average annual return for the past 20 years was just 6.6%. Think about that for a moment: If you earn 6.6% and pay 2.5%, you’re giving away almost 40% of your life savings in fees!
My second investment tip is to get a handle on your investment fees, and they come in two parts.
The first part is the management fee. This goes towards running the investment vehicle itself, such as the mutual fund or exchange-traded fund (ETF) that you invest in.
With a mutual fund, the management fee might be around 1.5% per year, because a lot of what you’re paying for is a portfolio manager and team of analysts who make decisions with your money. With an ETF, management fees are typically less than 0.20%, because you aren’t paying a high-priced team of money managers, you’re simply investing in a broad cross-section of stocks or bonds. However, in study after study, guess which approach has tended to perform better?
The second part is the fee for advice. If you work with a financial advisor, this is their sales commission. We see these fees commonly range from 0.50% to as high as 1.50% per year. What do you get for this fee? That depends a lot on the advisor. Usually, the main benefit is having someone to talk you out of bailing when the market starts to look shaky (see the previous section for why this is actually really valuable).
One way to save money on advice is to just skip it. Open a discount brokerage account and DIY your way to riches. You can buy your own ETFs and save a bundle.
Tip #3: Avoid the taxperson
You can squirrel away your money every month for decades and minimize your costs the whole time, and still have a huge anticlimax when the CRA asks for half your money in taxes. Tip number three is to try really hard to avoid this outcome.
Fortunately, the great land of Canada has multiple investment accounts that can help you reduce or even eliminate the impact of taxes on your investments. Here’s a quick primer:
RRSP: When you contribute money to your RRSP, you get to deduct that amount from your earned income for the year, which can lead to a tax refund. Your money gets to grow tax-free until you make a withdrawal. The idea is that you will not make a withdrawal until retirement and that you will be in a lower tax bracket at that time.
TFSA: You don’t get any tax breaks when you contribute to your TFSA, but you do get to keep all of your investment profits tax-free. This makes a TFSA great for situations where you expect to need the money before retirement.
RESP: This education savings account allows tax-free growth until the money is used for school. At that time, it is taxed at the student’s rate, which should be low or zero. As a bonus, you can also receive up to $7,200 in government grants to supplement your savings.
Unfortunately, the government can’t help you figure out how to optimize all of the features and benefits of these accounts. How much should you put into each one, and when? These are fairly complex calculations. Look at what you have today, what you’re trying to achieve, then figure out the most tax-effective way of using these investment accounts to get there.
One of the magical things about investing is you get to own parts of great businesses and make money while you sleep. I hope I have shown you that the keys to success are totally within your reach.