I work with a lot of young families who are trying to juggle the enormous pressures of paying off debt, saving for a house down payment, possible income disruption from taking a parental leave, moving, or changing careers, plus dealing with temporary but costly expenses like childcare, paying off a vehicle, or renovating a home.

Many are struggling to save and invest for the future because they’re just trying to stay afloat.

They’re also freaked out by ridiculous headlines showing they’ll need to save something crazy like $1.7M in order to retire comfortably.

On the flip side, many retirees have more than enough savings to meet their spending needs over their lifetime.

But instead of enjoying their retirement, they’re constantly on edge about the economy, the stock market, and inflation (among other things outside of their control).

To them, a comfortable retirement isn’t just about a number (and many of them do indeed have savings of $1.7M or more). The problem is their money psychology.

Imagine you spent your entire career dealing with financial anxiety – to the point where you developed a scarcity mindset and were always in savings mode.

How difficult do you think it would be to suddenly turn off the savings taps and turn on the spending taps in retirement?

The answer: Extremely difficult!

Think about it. If you’ve never exercised your spending muscles and just lived on, say, $50,000 throughout your entire 40-year career (while saving 20-40% of your income each year), how the heck are you going to go from spending $50,000 per year to spending $80,000 or $100,000 per year in retirement? It’s not going to happen.

In fact, I swear I spend more time trying to convince my retired clients to spend their money than I do working with them on optimal withdrawal strategies, tax planning, or their investment plan.

I don’t want you to have that type of relationship with money.

First, let’s acknowledge that it’s okay to save less in your 20s and 30s while you juggle competing financial priorities. In many cases, it’s impossible to consistently save 10% of your income for many years.

Related: The Rule of 30 approach to saving money

Adopting a staggered approach, where you might save 0% for a few years before ratcheting up your savings to 5%, then 10%, and finally 20% as your income grows and temporary expenses subside, allows you to do what economists call consumption smoothing – the idea that you maintain a relatively consistent lifestyle instead of depriving yourself during certain periods of high expenses, or instead of spending lavishly later in your career as those expenses ease and your income grows.

This aligns with what most of my retired clients say – that they want to maintain their current standard of living, if not enhance it slightly with extra spending on travel and hobbies for as long as possible.

Proper financial planning at appropriate times in your life can allow you to adjust course as needed to get your savings on track.

Finally, we tend to vastly underestimate how much we’ll receive from government programs like CPP and OAS. In many cases, these benefits can total up to $20,000 per year or more for individuals, and up to $40,000 per year or more for couples.

That helps take the pressure off having to save something ridiculous like $1.7M for retirement.

This Week’s Recap:

Last week I wrote about making the best of the bad mortgage options out there today. We chose a 1-year fixed rate and look forward to renegotiating next spring. 

Thanks to Rob Carrick for highlighting my article on how to choose the right asset allocation ETF in his latest Carrick on Money newsletter.

Now that we have our finances more or less figured out for this year and beyond, I took some time this week to look at our saving and spending plan for the remainder of 2023 and into 2024 (yes, I have a spending plan in place for 2024).

Then I did what I find a lot of small business owners are reluctant to do. I gave us a raise. 

My wife and I pay ourselves dividends in equal amounts to keep our taxes low and to simplify our finances. But we moved into a new house and took on a larger mortgage (at almost triple our previous interest rate). We made a promise to ourselves that we would still be able to live the life we enjoyed before buying this house, which meant continuing to spend money on travel, and still meet some personal savings goals like funding the kids’ RESPs and contributing to our TFSAs.

What that meant was our previous plan to pay ourselves $7,000/month in dividends wouldn’t cut it, so we bumped that up to $7,500 per month. Interestingly, that’s about a 7.1% increase from last year which would be somewhat inline with a proper inflation-adjustment (CPP recipients received a 6.5% increase in their benefits in January).

I think it’s important for business owners to pay themselves appropriately to meet their personal spending and savings goals. Too often, business owners leave this up to their accountants who may advise leaving as much money as possible inside the business rather than paying taxes personally. But, hey, you need to eat, and heat your home, and travel, and pay for your kids’ activities, and contribute to your RRSP or TFSA. Make sure you pay yourself accordingly.

Weekend Reading:

A Wealth of Common Sense blogger Ben Carlson explains why the stock market is not a casino:

“The stock market is the opposite of a casino. The longer you play, the higher your odds of success in terms of experiencing positive returns on your capital. The ability to think and act for the long-term is your edge as an individual investor. Patience is the ultimate equalizer.”

Investment advisor Markus Muhs bluntly says that investors should stop gambling on stocks. I agree 100%. We often sweat over the smallest details, like saving an extra 0.04% MER on a globally diversified ETF, or saving $4.95 per trade, but then turn around and dump 10% of our hard earned savings into individual stocks. I don’t get it.

Speaking of sweating over minor details, Justin Bender says that many DIY investors may be tempted to sell their all-equity ETF to save on fees – purchasing the underlying ETFs directly instead. Before taking the plunge, check out this video for several reasons why you should just stick with a single ETF:

Roc Carrick explains why firing your investment advisor to buy index funds could backfire (subs). I may be biased, but a DIY index investor pairs quite nicely with a fee-only financial planner that you can hire as needed to check in on your finances and update your financial plan. Just sayin’…

Here’s Squawkfox Kerry Taylor on why material things won’t make you happy (and what will).

Fee-only advisor Anita Bruinsma says if you’re experiencing a challenge with your money then you need to take an honest look at yourself and your numbers and face the facts.

PWL Capital’s Ben Felix explains why covered call ETFs sound too good to be true – because they are. Avoid ’em.

If you’re buying a new home and thinking about renting out your old one, don’t make this crucial mistake. Definitely not a strategy for me!

These are the biggest myths in personal finance — and they’ll cost you if followed blindly. Nice piece by Jason Heath.

Millionaire Teacher Andrew Hallam on how a cycle crash led to an important lesson in business and life.

Finally, why rethinking retirement might help solve Canada’s demographic crunch.

Have a great weekend, everyone!

We’ve finally moved into our new home and received the proceeds from the sale of our previous home. To recap, last year we entered into a purchase agreement to build a new house. We arranged our financing so that we didn’t have to sell the home we were living in to qualify for a new mortgage (avoiding the annoyance of potentially selling too early and having to find short-term accommodations before taking possession of the new house).

To do that, we took out a line of credit on the house we were living in and arranged for a new “draw mortgage” so we could make deposits on the new house as it progressed. The draw mortgage was held at TD in their Flexline product at TD’s prime rate. Needless to say, things got a bit dicey for this personal finance blogger as interest rates soared by 4.25% this past year.

We put our house on the market at the end of January and sold it at the beginning of April for 2.5% below the list price. The buyer’s possession date worked out great – one week after we took possession of our new house. 

All-in-all, while the process was stressful given the rapid rise in interest rates, the end result came close to my most optimistic financial outcome (hey, I’m a planner after all).

We put a chunk of the house proceeds down on the Flexline loan and were eager to switch that into a conventional mortgage term. I reached out to friend-of-the-blog and my go-to mortgage expert Rob McLister for some guidance on what to choose in this currently craptacular mortgage environment.

My typical mortgage strategy is to take the best of either a five-year variable rate or a short-term fixed rate. The idea being that variable rate terms tend to perform better than fixed rate terms, but sometimes you can’t get a good discounted variable rate so by going with a 1-or-2-year fixed rate you get a chance to negotiate again sooner than later.

Rob confirmed that strategy was indeed wise and shared the current best available rates:

“Were it me, I definitely would not go past three years and would likely bite the bullet on a 1-year fixed at 5.74% +/-. A lot of banks are quoting 3-year rates at 4.85%. That’s as far out on the curve as any qualified borrower should go. HSBC’s variable at prime minus 0.80% is decent. It has a great no-penalty break policy after 36 months. But based on the market’s implied forward rate outlook (for what that’s worth) a 1-year does a little better on paper, albeit with somewhat more rate risk upfront.”

Rob suggested to stick with a short-term fixed rate and ask TD to beat the best rate I could find elsewhere. That’s exactly what I did when I met with TD last week. Indeed, they matched RateHub’s 1-year fixed rate term at 5.74% (remember, this is an uninsured mortgage as we’ve put down well over 20%).

So we got the best of the bad mortgage options available today. We’ll see how the next 12 months go, and if we do get that elusive recession and/or inflation finally comes back down to target then hopefully we’ll see a drop in mortgage rates next year when we have to renew.

This Week’s Recap:

Last week I shared five investing rules to follow (in good times and bad).

I’m trying to be more active on Instagram and have an Ask Me Anything going on for the next 24 hours in my stories if you want to give me a follow and check that out.

Promo of the Week:

American Express routinely has the most lucrative travel rewards offers on the market and the current promotions for their premium cards are strongly worth considering for travel hackers.

We just booked a premium economy flight to Edinburgh (our favourite city) this summer, as well as business class tickets returning from Amsterdam. All in part to the number of points we earn from American Express cards.

First up, the American Express Aeroplan Reserve Card where you can earn up to 120,000 Aeroplan points (that’s up to $2,400 in value).

Earn 50,000 Aeroplan points after spending $6,000 within the first 3 months. Plus, in the first 6 months, you can also earn 7,500 Aeroplan points for each monthly billing period in which you spend $2,000. That could add up to anther 45,000 Aeroplan points. Finally, you can also earn 25,000 Aeroplan points when you make a purchase between 14 and 17 months of Cardmembership – an incentive to keep the card beyond the one-year mark.

Next we have the American Express Platinum Card, where you can earn up to 90,000 Membership Rewards points when you charge $7,500 in purchases to your Card in the first three months. Membership Rewards can be transferred to Aeroplan on a 1:1 basis, so 90,000 points can be worth up to $1,800 in flight rewards.

For business owners, there isn’t a more lucrative card than the American Express Business Platinum card. It has a high minimum spend requirement – $10,000 in the first three months – but if that’s doable for you then you can earn a cool 100,000 Membership Rewards points.

Finally, while not a new offer, the Amex Cobalt card is the best everyday credit card on the market and my go-to card for spending on food and drinks. Spend $500/month on groceries and you’ll not only max out the 30,000 point welcome bonus but you’ll also earn another 30,000 points from the regular spending. Transfer those 60,000 points to Aeroplan and get up to $1,200 in value from redeeming flight rewards.

Weekend Reading:

After a friendly inflation print for April (coming in higher than expected), borrowers are now concerned about another interest rate hike. Rob McLister explains why that may be disastrous for variable rate mortgage holders.

We often see how Canada Pension Plan is well funded and sustainable for at least the next 75 years. But what about Old Age Security, which is funded by general revenues? Here’s why Canadians can trust that they’ll continue to receive OAS benefits, even with countless economic challenges.

And here’s why you likely won’t get the maximum CPP retirement benefit (subs).

Barry Ritholtz looks at 10 bad takes on this current market.

Anita Bruinsma explains why Canadian investors need exposure to international assets.

Advice-only planner Andrea Thompson looks at a tale of 4 RESPs.

PWL Capital’s Justin Bender offers a helpful comparison between XEQT and VEQT to help you decide between these popular all-equity ETFs:

For business owners – should you pay yourself a salary or dividends (or a mix of both)? This paper looks at the optimal compensation structure for business owners residing in Ontario.

A new paper on finfluencers says investors flock to loudest, least skilled voices on social media. Yikes!

Hey, the 60/40 portfolio is back! (after never going away):

“One outlier year every 4 decades or so makes for a pretty reliable investment strategy. The academic evidence that this sort of investing outperforms all others over a long enough timeline is overwhelming.”

Kyle Prevost at Million Dollar Journey lists eight things you must do to prepare for the death of a spouse.

This is a must read – How retirees can overcome ‘irrational’ saving and enjoy their money:

“The so-called “retirement consumption gap” often stems from an inability to switch off a saving mindset and fears of running out of money, especially as the cost of living rises and people live longer.”

Trying to make up for stock market losses can be costly, impulsive and misguided. Here’s why you keep chasing the wrong stock market.

Finally, a conversation with former Bank of Canada Governor Stephen Poloz on how to adapt to the age of uncertainty. The bottom line: the future is risky, but we’re going to be fine.

Have a great long weekend, everyone!

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 dividend paying stocks, and straying from blue-chip stocks to chase 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.

Related: How to choose the right asset allocation ETF

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.

Last year’s winners often become this year’s losers (and vice-versa). International stocks have had a miserable decade of returns, but are leading the way so far in 2023. Emerging markets returned a whopping 79% in 2009 but have averaged a pitiful 0.99% per year for the past 15 years. The S&P 500 was the darling of the 2010’s, but suffered a lost decade in the 2000’s. REITs have had a wide range of outcomes, with the best year returning 41.3% and the worst year losing 37.7%.

The lesson? 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. So, effectively, you are investing a lump sum immediately – just like the study recommends. It’s just that your lump sum may be $500 every two weeks.

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 had a terrific run between 2009 and 2021, and during those 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 to a robo-advisor platform, or to buy their own index ETFs with a low-or-no-commission trading platform. 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 0.24%.

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 and investing 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 34% in about a month during the March 2020 crash. 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 up about 62% since then (not including dividends). If I would have sold at the bottom of the crash (March 23), I would have locked in that 34% 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 stock markets go 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 0.24%. I also switched to a low cost trading platforms like Wealthsimple Trade and Questrade 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, my kids’ RESP, plus contributing regularly to my corporate investing account.

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.

Need some help getting started? Check out my DIY Investing Made Easy video series where I walk you through exactly how to break up with your advisor and set up your own self-directed investing account.