Monday, January 11, 2021
This is why your investments suck
I see it all the time. Many, many, many people come to me wondering why their investment accounts haven’t grown, or worse yet, lost money. Far too often people have come to me after 2, 5, even 10 years and have seen little to no growth on their investments. The typical “Instagram Influencer” answer for this issue would be that you should focus on what fees you are paying or why you didn’t invest in Tesla or Bitcoin. The truth is the typical “Instagram Influencer” has no clue what they are talking about. Here are many reasons why your investments are underperforming, and it has nothing to do with fees or the hot new stocks on the scene. I have laid out the real reasons Why Your Investments Suck. Let’s get to the bottom of this today.
You aren’t saving enough
Sorry, but it is true. I call it new investor syndrome. You work your butt off to save up $5,000 and then at the end of the year, it has morphed into $5,500. Now I am no mathematician, but that looks like 10% to me. You ask anyone on the street if they want 10% on their money and they will say hell yeah. The issue to the new investor is that $500 growth isn’t making waves for them. There is an infallible truth that exists in our world: You need money, to make money. What’s 10% of zero dollars? What’s 10% of one million dollars? What is 100% of $100? What if I could promise 100% on your $100 this year. That is pretty amazing, isn’t it? Yet you only made $100. That $100 is not changing your life. What will change your life is contributing regularly to your investment accounts. Your initial growth will come mainly from the money you put in. Over time that will switch to the interest on your investments compounding at a great rate. Do not be discouraged by small movement when you first start out. Be more concerned with your savings rate and savings regularity. Let Dollar-Cost Averaging and time take care of the rest.
You aren’t actually invested at all
There is a scary trend of people having their investments sitting in straight cash or simple interest. A recent poll shows that 42% of Canadians with a Tax-Free Savings Account (TFSA) have it sitting in cash. Like a checking account. Making absolutely zero interest. There is literally NO POINT TO THAT. You do not open an investment account simply because you think you should have an investment account. You open an investment account TO INVEST YOUR MONEY. Revolutionary, I know. I will be signing autographs later. While I do blame you, I mainly blame the person who helped you open the account. They should have advised you that the TFSA or RRSP (Registered Retirement Savings Plan) are not simply savings accounts, they are investment accounts. They can hold a variety of different investments including stock, bonds, mutual funds, ETF’s, etc. They are tax-advantaged, meaning they save you money on tax, so you want to get the most growth out of them that you can get. This will not happen with cash or even low-interest investments such as GIC’s or so-called “high-interest savings” plans. Many banks will try to draw you in with initial offers to move your money to them. “Take advantage of our high-interest TFSA with an amazing 2% introductory rate for the first 3 months.” Puke. Caught in the fine print is that the rate drops after 3 months to bare bottom and you may even be locked in for several years to get that 2% for only 3 months. Long story short; understand what you are invested in and if you feel as if your accounts aren’t moving at all it is probably because you aren’t invested in anything.
You aren’t properly invested
I speak about this all the time. We just established that you want to be invested period. Now that you are invested, let’s make sure that you are properly invested. What does that mean Joe? DIVERSIFY! To diversify is to spread your investments over many different sectors (areas of business, ie. technology, energy, healthcare, financials, etc.) and many different regions (Canada, the US, Europe, Asia, Emerging Markets). This will protect you against one sector or region lagging on the year. For instance, the Canadian market in 2020 had a relatively lackluster year mainly due to the pandemic and its aftermath. Emerging Markets however had a great year, bouncing back quite nicely even during the pandemic. The goal is to get positive, healthy returns even if one piece of your portfolio does not do quite well. No advisor, even me, can predict which area will do the best year to year. This is why your best bet is to simply incorporate a balanced strategy across these 4 areas:
Growth and Income (Boring, large companies that have a mandate of consistent growth)
Growth (Mid-sized companies that can experience larger growth, but also can fluctuate with economic conditions)
Aggressive Growth (These are smaller companies or less infiltrated regions that can produce huge growth, but are also somewhat volatile. Think Emerging Markets)
International (Helps spread your risk to the stalwarts of Europe and Asia)
If you spread yourself out amongst these 4 areas you will have a well-balanced portfolio that will also perform, even in downtimes. I see far too many investors with all their holdings in only Canadian companies and that is not a winning strategy.
This one is not fully your fault, but after you read this paragraph it then becomes your fault, so pay attention. Your advisor should have an “investment philosophy.” I outlined mine in the previous paragraph. There must be a reason for doing what they do and choosing what they choose. Otherwise, they are just throwing darts at a board or even worse, chasing last year’s winners. If you are invested in a “Comfort Balanced Portfolio” fund or “Select Growth and Income” fund or anything like that, you have been simply put into a fund without much thought. The reason is simple. Time. It takes time to get to know you. It takes time to get to know your goals and dreams. Even more so, it takes time to research and build a portfolio. I spent months building mine and continually research and follow them. Certain advisors, especially at the banks, do not have the time or wherewithal to do this kind of work. There is a level of accountability that comes with making recommendations, and many run from that. The problem with these styles of funds mentioned earlier is that they often underperform. They dilute returns simply because they have too many holdings and/or have higher management fees. I see far too many young people in balanced portfolios, achieving little to no growth when a 10-minute conversation with me showed me that they in fact were an aggressive investor. There is no wrong or right style of investing. It is only wrong or right FOR YOU. Your advisor must first know you and then match the investments to your risk tolerance and time horizon.
You are underexposed to the market
When my clients first sign up with me, I prep them for market crashes. “How would you feel if your $10,000 was $7,000 at the end of the month?” Yes, that did happen last March. I want them to know that the markets will go down, and sometimes sharply. When they do, I often go to them and ask them how they feel. Most of the time they do not feel great. It is reasonable. Who likes when their investments go down? At that point, I will smile and say, “Good, this is good.” “How is this good?” they often reply. When the markets go down, and your investments go down with it, it means you are feeling the market. The goal is to not lose as much when they go down, and then outpace them when they go up. If the markets go down and you do not see any movement at all, that more than likely means you are not invested, or not invested properly. You want to experience the ups and downs of the market because that means that you will experience growth when markets rebound. Which in the over 100 years they have existed, has ALWAYS happened. Long story short, if your investments never go down, they probably will never go up either.
You touch them too much
A colleague of mine once said, “Your investments are like a bar of soap. The more you touch it, the smaller it gets.” It’s true. STOP TOUCHING YOUR INVESTMENTS. You can’t expect money to grow if you keep pulling money out (often at inopportune times), shifting funds around, getting scared and jumping out of the water, or just plain old over-analyzing them. “But the crash is coming!” Says who? When? And when it happens, then what? Your success is predicated on investing efficiently and often. If your investments are efficiently invested, just keep investing. Stop taking money out. Stop listening to what so-called “influencers” on social media or the TV say. Even worse, what your dumbass friend says who drives a truck for a living. No offense to truck drivers, I love them, I just don’t take my financial advice from them. How to get to Florida in 36 hours, then I will ask a trucker. 5 words my friends: Set it and Forget it. Put your money in early and often and walk away. If that means you never look at it, so be it. Whatever it takes for you to ALLOW your money to grow.
You got too cute
Or your advisor did. Someone got cute. We all love cute things, but cute doesn’t pay the bills. What I mean by getting too cute is that sometimes people think they are some sort of creative genius and try to reinvent the wheel. You see this with portfolios heavily concentrated in volatile sectors like natural resources. You see this with people who jump on investing trends like marijuana stocks and cryptocurrency. You see this with advisors who promise you returns. No one can guarantee you a return unless it is in a guaranteed investment like a GIC. Anyone who comes to you promising 7% or 10% is literally full of crap. All we know is what happened. None of us know what is going to happen. This is why you stick to rock-solid practices like a well-diversified portfolio instead of looking at 1-year returns and trying to replicate those gains. Every single year there is a new thing to throw your money at or a fund from last year that really kicked butt. Every single year there is also a bunch of people who lose money trying to get a quick win. This is not how you build wealth. You won’t be a hit at parties talking about your Canadian Concentrated Equity Fund. Let the guy with 10K in Bitcoin get all the attention. Your investments should be BORING. That is real wealth creation. Boring funds doing boring things, like growing on a consistent basis. Leave the cuteness for the Corgis.
Joseph James Francis is a Financial Advisor and Money Coach based in London, Ontario, Canada.
Email – firstname.lastname@example.org