I wish I had a playbook to follow when I first started investing. If I did, maybe I could’ve avoided some of the investing mistakes I made along the way. That journey had me investing in high fee mutual funds, narrowly concentrating on a handful of Canadian stocks, and straying from blue-chip stocks to chasing higher yields.

I figured things out, eventually. I ditched my expensive mutual funds in 2009 and opened a discount brokerage account. Not knowing anything about index investing, I latched on to a dividend growth approach and started picking individual stocks to hold for the long term.

It wasn’t a bad strategy. My portfolio of dividend payers saw returns of 14.79% a year from 2009 – 2014. That compared favourably to CDZ, the iShares ETF that also tracks Canadian dividend stocks, which returned 13.41% during the same period.

At the same time an enormous pile of evidence showed that passive investing with index funds or ETFs would outperform active investing strategies over time. The idea was simple enough. Just buy the entire market, for a very small fee, and reap the benefits.

I was finally convinced to pull the trigger and dump my dividend investing strategy in favour of a two-ETF indexing solution (which is now my one-ETF portfolio of VEQT).

One of the biggest catalysts for me to change my behaviour was the evolution of ETF products that made it easy to broadly diversify with just one or two ETFs. Not only that, but the advent of robo-advisors also makes it easy for investors today to get started without first falling for the big bank mutual fund trap.

That’s why I wanted to write this guide – to help new investors avoid the mistakes I made when the landscape was much different than it is today, and to be a playbook for experienced investors to get them through volatile times like these.

Here are my 5 investing rules to follow in good times and bad.

Investing Rule #1: Diversify

Nobel Prize winner Harry Markowitz said that, “diversification is the only free lunch in investing.” It’s easy to fall into the trap of chasing last year’s winners, whether those are individual stocks, ETFs, or top performing countries or regions. But last year’s best performer could just as easily be this year’s worst.

A diversified portfolio holds many stocks and bonds from across the globe and ensures you always capture the best performing asset classes each year.

Yes, that also means you’ll hold this year’s worst performers. But here’s the thing. No one can predict which stocks, bonds, ETFs, countries, or regions will outperform or lag behind. Anyone who claims they can is suffering from some serious hindsight bias.

One clear way to visualize how and why diversification works is with the periodic table of investment returns. Each year it shows how different asset classes perform, and the results are often striking.

Periodic table of investing returns

Canadian equities were the big winner in 2016, fell to the middle of the pack in 2017, and were the worst performer in 2018. Time to ditch Canada, right? Wrong. The next year Canadian markets posted a whopping 22.88% return, second to only U.S. equities.

Diversify.

Investing Rule #2: Dollar Cost Average

There’s a compelling study from Vanguard that shows how investing a lump sum all at once outperforms dollar cost averaging two-thirds of the time. But don’t let that fool you into thinking dollar cost averaging doesn’t work. That study talks about investing a large amount – say, from an inheritance. What it says is that it’s best to put that money to work right away rather than over a period of time.

Most of us don’t have a large lump sum to invest. We’re putting away a few hundred bucks a month. The point of dollar cost averaging in this context is to invest small amounts frequently rather than saving all of that money up as cash and then making one lump sum contribution.

Dollar cost averaging works because you’re buying small amounts with every contribution. Think about it like buying gas for your vehicle. Some days the price is higher, some days it’s lower. But if you always put in the same dollar amount every time, you’ll buy more gas when prices are lower, less gas when prices are higher. That smooths out the effects of market fluctuation.

The best way to set up your dollar cost averaging system is with automatic contributions aligned with your pay day. This approach ensures you always pay yourself first, rather than trying to save and invest what’s left in your account at the end of the month.

Most banks, robo advisors, and discount brokerage platforms allow you to set up automatic contributions every week, two weeks, or once a month. Some will even automatically invest that amount into the investment(s) of your choice.

Investing Rule #3: Fees Matter

Global stock markets have had a terrific run over the last 10+ years, and during good times investors are less likely to question the fees they pay for advice. Here’s why they probably should:

Research from Morningstar clearly shows that fees are the best predictor of future returns. Put simply, the lower the fee, the higher the expected return of a comparable product.

This shows up in my own analysis of the returns of big bank Canadian equity funds versus their index fund equivalents. Banks sell their expensive equity mutual funds to retail investors like you and me, even though they all have a lower cost index fund alternative in their line-up.

In every single case the lower cost index fund outperforms the higher cost mutual fund. The difference in returns is often equal to the difference in fees between the two products. Hmmm.

And, while new investors shouldn’t focus solely on fees, they should look for alternatives to pricey big bank mutual funds and look instead at index funds like TD e-Series, or a low cost robo-advisor like Wealthsimple, or to buy their own index ETFs with a self-directed online broker like Questrade. Whatever it takes to get you investing regularly in a low-cost diversified portfolio that you can stick with for the long-term.

A robo-advisor might charge a management fee of 0.50%, plus the cost of a portfolio of ETFs (add another 0.15% or so). They’ll automatically invest your money and rebalance it as needed, for a true hands-off investing solution.

Index funds can be purchased at any bank for a management expense ratio (MER) of around 1%. TD’s e-Series funds are the cheapest, where a diversified portfolio will cost around 0.40% (with the caveat that you’ll have to buy and rebalance the funds on your own).

If you opt for a self-directed approach, you can build your own diversified portfolio of ETFs (sometimes with just one ETF) for a fraction of the cost of a robo-advisor. Vanguard’s VBAL, for example, gives investors a portfolio of 60% stocks and 40% bonds from around the world at a cost of just 0.25%.

See my top ETFs for Canadian investors for more information.

Investing Rule #4: Save More

Many investors dream of huge Warren Buffett like returns driving their portfolios higher. In reality, it’s your savings rate that has the biggest impact on the growth of your portfolio, at least in the early stages of investing.

A good rule of thumb is to save and invest 10% of your paycheque for retirement. But that’s not a catch-all rule. Young investors have many competing priorities, such as debt repayment, short-term savings goals, a mortgage to pay, a family to raise, and so on.

Related: How to make saving a priority

Don’t put off investing for retirement just because you can’t meet an arbitrary 10% rule. The key is to get started and build the habit of saving for the future. Start with 2-5% of your paycheque and set up those automatic contributions. You won’t even notice it coming off your paycheque or out of your chequing account, and meanwhile you’ll be well on your way to your first $1,000.

Then, as your budget allows for it, increase that savings rate over time until you can meet that 10% goal.

One important tip is to keep increasing your savings amount (in dollar terms) to align with any increases in income. For example, say you make $50,000 and save $5,000 per year. If your pay increases to $55,000 you should increase your savings contributions to $5,500 to maintain that 10% savings rate.

Finally, for many late starters, saving 10% won’t be enough. If you’re behind on your retirement savings, then you may need to aim for a 15 – 20% savings rate to meet your retirement goals and catch up on lost years of compounding.

Investing Rule #5. Stay the Course

Look in the mirror and you’ll find your own worst enemy when it comes to investing. Despite constantly being told to buy low and sell high, never to time the market, and to ignore market pundits and doomsayers, many investors continue to take the opposite approach to managing their investments.

My all-equity portfolio fell 30% during the coronavirus crash in March. Even as an experienced investor, I had to steel my nerves and try to avoid looking at my portfolio and reading all of the pessimistic investment news.

Thankfully, I held on and watched my portfolio recover the following month. It’s still down, but only about 11% year-to-date. If I would have sold at the bottom of the crash (March 23), I would have locked in that 30% loss and also missed out on the fast and furious rally that followed.

That’s the point of staying the course. We don’t know what markets are going to do in the short term. But we have lengthy historical data that shows the stock market goes up more than twice as often as they go down. Those are pretty good odds to stay invested, even in a severe downturn.

Final Thoughts

These five investing rules weren’t always my guide, and so they didn’t save me from making mistakes early on in my investing career. I’ve had to learn my lessons along the way.

Today, I invest in a globally diversified portfolio (with Vanguard’s VEQT). I use dollar cost averaging, with frequent contributions going into each of my investment accounts every month.

I keep my costs low. VEQT has a management expense ratio of just 0.25%. I also switched to a zero-commission trading platform (Wealthsimple Trade) to avoid paying transaction costs every time I bought units of VEQT.

I strive to save more every year, with the goal of maxing out the available contribution room in my RRSP, TFSA, and my kids’ RESP.

Finally, I stick to my plan and stay the course regardless of the market conditions. I’m investing with a long-term outcome in mind.

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9 Comments

  1. Bill on May 21, 2020 at 1:58 pm

    Hi Rob,

    In regards to Rule #3 you state to keep costs at a minimum. With this in mind, wouldn’t it make more sense to invest in multiple stocks and create your own diversified portfolio as opposed to an ETF (VEQT) that charges 0.25%? Theres no MER associated with stocks, therefore would that not be the better way to go? Appreciate the thought and detail you put into your posts!

    • Robb Engen on May 21, 2020 at 2:12 pm

      Hi Bill, it’s true that you can buy stocks for free on a platform like WS Trade and try to build your own diversified portfolio. Here’s why I think that’s a mistake:

      1. Are you truly diversified? Sure, you can probably get enough diversity in the Canadian market with 20-30 individual stocks. But what about the U.S. and international holdings? They’re crucially important to a diversified portfolio, yet many stock pickers just hold Canadian stocks. Expanding to a global portfolio would mean holding many many more stocks to get proper diversification.

      2. Simple > Complex – You can build a globally diversified portfolio with just one or two ETFs, which own thousands of stocks and bonds from around the world. The cost is minuscule to get that type of instant diversification, not to mention the automatic rebalancing that comes with the asset allocation ETFs like VBAL or VEQT.

      3. Trading fees – Wealthsimple Trade is NOT for everyone. It’s a mobile-only platform that’s not ideal for stock traders. That means sticking with a big bank brokerage, where you’d pay $9.95 every time you buy or sell. That adds up in a hurry when you have many stocks in your portfolio. The alternative is Questrade, but even then you’ll pay at least $4.95 per trade for stocks. Depending on the size of your portfolio, trading fees might be higher than the MER of an all-in-one ETF.

      Finally, it’s impossible for a new investor to build a proper diversified portfolio of individual stocks with little money. It’s much easier to put $5,000 into VBAL, or a robo advisor, and focus on rule #2 (dollar cost average) and rule #4 (save more).

  2. Kyle on May 21, 2020 at 2:02 pm

    Hi Robb,

    I recently moved to a discount brokerage from mutual funds and add to my ETF positions semi-monthly to take advantage of dollar cost averaging. The problem I’m finding is that my orders don’t always get filled the day that I make them and it ends up taking a couple tries to do it.

    I’m entering daily limit orders at 1% below the previous day’s close. Is there a better way to do this? Am I being to agressive when setting my limit order? Should I set it as good until filled?

    Thanks in advance.

    • Robb Engen on May 21, 2020 at 2:23 pm

      Hi Kyle, you’re probably being too aggressive with the limit order. Is there a reason why you chose 1% below the close?

      As Canadian Couch Potato author Dan Bortolotti said, “Using limit orders is not like haggling with a salesman on a used car lot: you can’t get a good deal just because you drive a hard bargain.”

      He says a good rule of thumb is to set your limit order two cents above the ask price when buying. If you set it below the ask price there’s a good chance it won’t get filled. And if the order can indeed be filled at the ask price then you’ll get it at that price – you won’t have to pay two cents more just for tipping your hand earlier.

      I should also mention that you should only trade when markets are open – not after hours when there can be more volatility between today’s close and tomorrow’s open.

      • Kyle on May 21, 2020 at 4:36 pm

        Thanks, that is precisely what I was doing.

        To your other point, I was placing my orders about an hour after the markets opened, so at least I got that part right.

        Keep up the good work!

  3. Connie on May 21, 2020 at 8:51 pm

    Hi Robb,

    I just opened an RESP for my son at Questrade, just curious if you have articles on how you invest in your kid’s RESP. I was contemplating investing in VGRO or XGRO since he’s young. Thank you!

    • Robb Engen on May 22, 2020 at 9:40 am

      Hi Connie, I’ve written a few articles about RESPs and how I invest in that account. Here’s one: https://boomerandecho.com/my-td-e-series-resp-portfolio/

      I use TD e-Series funds, with the thinking that I’m making regular contributions and index funds are free to purchase. I also, at the time, liked having everything in one place and since I bank at TD it made sense to set-up the RESP account there as well.

      Investing in an RESP is like a trial run for your retirement savings (albeit in a shorter time frame). Since you only have 18-20 years or so before your child needs to access the funds, you can start out fairly aggressive with 100% equities or an 80/20 portfolio.

      The key is to reduce your equity exposure over time so that you end up with the majority of your portfolio in fixed income when it comes time to withdraw the funds. Maybe by the time your child is 10 your asset mix is closer to 60/40 or 50/50. By the time he’s 15 or 16, that mix should be closer to 30/70 or 20/80.

      The all-in-one ETFs are perfect for this as you can start out in XGRO and then sell that and buy XBAL, and then sell that and buy XCNS as you proceed through that glide path.

      Lastly, I’ll just say that free trades were a big factor in me initially choosing TD’s e-Series funds. And with Questrade, you can get free ETF purchases as well, which is handy when you’re contributing regularly.

      • Connie on May 22, 2020 at 8:48 pm

        Thank you so much!

  4. Rob on May 23, 2020 at 8:48 am

    “fees are the best predictor of future returns”

    At first glance, I read that not as predictor but as “predator”. Both work, n’est pas?

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