5 Investing Rules To Follow (In Good Times and Bad)

By Robb Engen | May 21, 2020 |
Posted in
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.

Weekend Reading: Big Financial Mistakes Edition

By Robb Engen | May 16, 2020 |
Posted in
Big Financial Mistakes Edition
When it comes to money, no one has it completely figured out. We can learn a lot from our own failures and from the mistakes of others. Stories like the one shared by Kind Wealth founder David O’Leary – who filed for bankruptcy at age 25 – highlight the fact that no matter who we are, we’ve all made a mistake or two with our finances. There’s no shame in admitting it, and by sharing our financial failures we can help others avoid potential pitfalls in their own lives.

Humble Dollar blogger Richard Quinn fessed up to 10 big financial mistakes in a recent column, from betting on penny stocks in his late teens, to selling investments at a loss to buy an engagement ring, to borrowing from his retirement account to pay for his kids’ college education. Despite his many money failings, Mr. Quinn still managed to retire comfortably – something he attributes to working for the same company his entire career.

I’ve shared plenty of my own financial mistakes in this blog. I started investing in an RRSP at age 19 when I was earning less than $25,000 per year and still had student loan and credit card debt. I had to cash out my RRSP to pay off my maxed-out credit card. 

I got in over my head as a first time home buyer and needed a roommate to help pay the mortgage. When he moved out I once again turned to my credit card to cover my monthly shortfall. Not smart. 

I took out a second mortgage – basically a consolidation loan – to pay my high interest debt and clean up my act. Thankfully, it worked.

I bought mortgage life insurance once. Never again.

My investing journey began with high fee mutual funds (I’ll take a pass since it came with an employer-match), turned DIY when I decided to pick individual dividend stocks, before finally coming to my senses and switching to index investing.

I’m still making mistakes and learning as I go. I quit my job last December to focus full-time on writing and financial planning. It was the best decision I’ve ever made for my career and for my family, but now I regret not doing it sooner.

What are some of your financial mistakes? Share them in the comments below.

This Week’s Recap:

I managed one post this week, opening up the Money Bag to answer reader questions about bonds behaving badly, investing USD, active management in a market crash, and how I’m handling my credit card rewards and loyalty points.

In other news, I’ve opened a corporate investment account at Questrade. If you recall, I received an excess cash payout from my pension which means I won’t have to take out any money from our business this year. 

My plan is to keep a cash balance of six months worth of projected 2021 expenses (when we will resume paying ourselves), and then invest any remaining funds. 

Finally, many thanks to Rob Carrick for including my article on renewing your mortgage in his latest Carrick On Money newsletter.

Weekend Reading:

Credit Card Genius compares five digital wallets and explains why they’re safer than your physical wallet.

A Wealth of Common Sense blogger Ben Carlson describes the five types of investors in this market. Which one are you?

Warren Buffett says he’d disagree violently with the notion that passive investing is dead.

The federal government announced this week that seniors who qualify for OAS will be eligible for a one-time, tax-free payment of $300, and those eligible for the GIS will get an extra $200.

Rob Carrick says seniors deserve help with expenses in the pandemic, but investment losses is another matter:

“It’s not the job of government to backstop individual investing losses. If anyone loses money in the stock market, that’s on them.”

Meanwhile, parents are in financial limbo after spending thousands on sports, arts, and summer camps that have been derailed by COVID-19. Our kids are finishing up their ballet and piano lessons online with Zoom and Skype, respectively. We hadn’t committed to any summer camps because we thought we’d be travelling in the U.K.

Here’s a very good and relevant piece from Jonathan Chevreau on whether retirees should reduce their RRIF payments during COVID-19. The government gave RRIF holders the option to withdraw 25% less than their minimum mandatory withdrawal rate this year.

PWL Capital’s Ben Felix digs into the 4 percent rule in his latest video on how to retire early:

Millionaire Teacher Andrew Hallam shares a stellar post on why Canadians are wasting billions on currency-hedged ETFs.

Michael James reviews the financial documentary, Playing with F.I.R.E. I watched it last week and really enjoyed it as well.

Erica Alini of Global News looks at coronavirus and the housing market, and asks if it’s a good time to buy.

Finally, here’s travel expert Barry Choi on what the future of travel may look like

Have a great weekend, everyone!

Money Bag: Bonds Behaving Badly, Investing USD, and More

By Robb Engen | May 14, 2020 |
Posted in
Money Bag: Bonds Behaving Badly, Investing USD, and More
Welcome to the Money Bag, where I answer questions and address comments from readers on a wide range of money topics, myths, and perceptions about money. No question is off limits, so hit me up in the comments section or send me an email about any money topic that’s on your mind.

This edition of the Money Bag answers your questions about bonds behaving badly, investing USD cash in a TFSA, active management during a market crash, and how I’m managing my credit card rewards points.

First up is Wendy, who wants to know why her bond cushion didn’t do the job she expected it to do during the market crash. Take it away, Wendy:

Bond Cushion Not Working

Hi Robb,

I am in my early 60s and a regular reader and fan of your blog. I hold bond ETFs in my portfolio, along with some equity ETFs. The 30+% recent drop in portfolio value certainly made me flinch but I never once consider selling. I’m a firm believer in index investing and holding to my plan for the long-term.

However, the bonds have not done the job I’ve expected them to do. Even before the pandemic, my bond holdings have been in the “red”.

I hold ZCS in my RRIF, which has performed okay with only +/-5% difference, nothing to quibble about. But I also hold ZHY and ZEF in my TFSA. Today they are down -18.4% and -13.9% respectively, twice that a few weeks ago and more than ZLB at -13.28!

Why have the High Yield US and Emerging Market bonds done so poorly since I bought them in 2017?

Hi Wendy,

Corporate bonds can behave much differently than government bonds because they are much riskier assets. Especially ‘high yield’ bonds like ZHY – high yield typically means riskier debt has been issued by companies with not so stellar balance sheets. These bonds took a massive hit during the pandemic as investors flocked to the safety of government bonds.

A more diversified bond ETF like VAB (Canadian aggregate bonds) did much better throughout the crisis, with a return of 2.95% YTD. Here’s a better look at what has happened in the bond market during the coronavirus crisis:

Bond returns

During a crisis, investors look for safe-havens and the bonds issued by the U.S. Treasury Department are backed in full faith by the U.S. government and therefore free from any credit risk. That’s why long-and-medium-term U.S. treasury bonds performed so well, while high yield corporate bonds and emerging market bonds got hammered.

As for what to do, I find investors often get trapped in thinking they’ll just wait for their initial investment to “recover” before selling and switching strategies. But, I’d re-frame that thinking and consider if you had that money sitting in cash right now, would you invest it in the high yield bond funds or would you invest it in something else that had a higher expected rate of return and/or was better aligned with your investment strategy? 

Investing USD Cash in a TFSA

Next up is Martha, who wants some advice on how to invest the USD cash in her TFSA:

Hello Robb,

My TFSA contributions are maxed out and is comprised of CAD $52,000 (invested in the Canadian Portfolio Manager Ridiculous Portfolio of 80% stocks / 20% bonds) and USD $16,500 cash.

I don’t want to convert this USD to CAD just yet, but rather prefer to grow it somehow. Do you have any suggestions on specific Canadian listed USD ETFs, GICs or bonds that would be suitable to park my USD?

I put this into my TFSA because of the tax-free nature of the account and all the gains/interest coming back to me. I say Canadian listed because of the foreign withholding taxes eating away at my portfolio. I’m still a newbie to the DIY investing and have to move forward from analysis paralysis.

Hi Martha, thanks for your email. So, I think there are couple of points to clarify here:

1.) There is no such thing as a Canadian-listed USD ETF. There are U.S.-listed ETFs that you can buy with U.S. dollars – such as Vanguard’s VOO, which tracks the S&P 500. And there are also Canadian-listed ETFs that track U.S. or International indexes, such as Vanguard’s VFV, which also tracks the S&P 500. You buy these ETFs with Canadian dollars.

2.) There is no real advantage to investing in U.S.-listed ETFs inside your TFSA. They’re more advantageous, tax-wise, to use inside your RRSP. That’s because you cannot avoid foreign withholding taxes in your TFSA – they’re unrecoverable because the TFSA is not recognized as a retirement account by the U.S.

Since the exchange rate is quite favourable right now (1 USD = 1.41 CAD) why not convert that money to CAD and then just buy one or more of the Canadian-listed ETFs that Justin Bender outlined for TFSAs in his ridiculous model portfolio?

Finally, if you’re still new to this I’d highly recommend keeping things extremely simple with the one-ETF asset allocation ETF like I’ve outlined in my top ETFs and model portfolios.

I’ve seen a number of investors struggle with more complicated portfolios that look great on a spreadsheet but once put into practice become unwieldy to manage on their own. Heck, I consider myself an expert and I just invest in one ETF – VEQT.

Active Management in a Market Crash

Jason wants to know if there’s any merit to the argument that active management can perform better during a bear market:

Hi Robb,

I am a DIY ETF investor and recently had an investment advisor contact me about the value of professional advice. He said in markets like this, where there is a dichotomy between those companies / sectors doing well and those doing poorly, index ETF investors are missing out on active management. How do you respond to that argument? 

Hi Jason, thanks for your email. If the advisor is talking about adding value through active management and market timing then you should run the other way.

No one could have predicted with any degree of certainty which stocks would fall and which stocks would perform well. Anyone who claims they can is doing so with extreme hindsight bias (of course Clorox would be up 25%, who didn’t see that coming?)

As far as I’m concerned, investing has been solved. Low cost, broadly diversified index ETFs are the best choice for long-term investors. Gone are the days when advisors can claim to add value by picking winning stocks and timing the market.

Where an advisor can add value is in financial planning, tax management, estate and legacy planning, psychology, accountability, prioritizing short-and-long-term goals, etc. 

The bottom line is that investors shouldn’t change strategies based on market conditions. Period.

Have You Changed Your Approach To Credit Card Rewards?

Finally, Amit wants to know if I’ve changed my approach to credit card rewards during these stay-at-home times:

Hi Robb, you’ve written a lot about credit card rewards and travel rewards in particular. Now that we can’t travel for the foreseeable future are you doing anything different with your current credit cards and rewards points?

Hi Amit, it’s a tough time for credit card rewards junkies like myself. For one, we planned to do a heck of a lot of travel this year and take advantage of programs like Aeroplan, Marriott Bonvoy, American Express Membership Rewards, and WestJet Dollars. Not to mention all the perks that come with those programs, like free hotel nights and upgrades, airport lounge passes, and companion travel vouchers.

With our trip to Italy cancelled and our trip to the U.K. likely to cancel next, we’ve got an abundance of travel rewards points and nowhere to use them. 

  • Aeroplan – 560,000 miles
  • Marriott Bonvoy – 136,000 points + 3 free nights
  • American Express Membership Rewards – 220,000 points
  • WestJet Dollars – $637 + 2 companion travel vouchers

My typical advice is to use your points fairly quickly and not hoard them. Loyalty programs often get devalued and expiry policies can also change at any time. However, in These Times, I believe the major credit card rewards programs and loyalty programs will want to hold onto their members for when we can return to travelling again. Marriott, for example, extended its free night certificates to no longer expire within a year. 

Besides hanging onto my travel rewards points, I’ve made the switch to a cash back credit card and have been using the Scotia Momentum Visa Infinite card for everyday purchases like groceries (and MORE groceries). I figured cash back would be more useful in the short-term, and this card had a 10% cash back bonus for spending in the first 3 months. Not bad!

I also use instant-reward programs like PC Optimum and Air Miles Cash to get a quick $10 off a grocery purchase – which comes in handy during a pandemic.

Do you have a money-related question for me? Hit me up in the comments below or send me an email