When I first started investing in the stock markets about 6 years ago, I had very little investing knowledge and I was too ignorant to read investment books. I went to my local bank branch and booked an appointment with the financial adviser to see which mutual funds would be suitable for investing. Before the appointment I knew I wanted to keep the management management expense ratio (MER) low. With my little knowledge, I thought picking some mutual funds that tracked the market index would be a good idea. When I met the financial adviser he was not too keen about the index mutual funds and suggested an actively managed mutual fund instead. The actively managed mutual fund had a much MER than the funds I was looking at. However, the adviser showed me a bunch of fancy charts and diagrams and told me that the actively managed mutual fund had much better returns over the years. Somehow I got convinced by the financial adviser and dropped $8,000 on the recommended mutual fund. Yeah pretty silly, I probably gave a good Christmas bonus for this particular financial adviser...
Through work we have the option of enrolling in a non-registered savings plan where certain percentage of my pay cheque is deducted to purchase mutual funds in a non-registered account. When I was eligible for this program I immediately signed up. “The returns of these funds are great, the MER is about 2 - 2.5%. I can’t lose money on these investments!” I thought to myself. So I allocated 5% of my pay cheque every 2 weeks to buy these mutual funds. All of the funds I was purchasing were actively managed funds since there were no index funds available.
A few years into my mutual fund investment journey, I was not getting much of a return. The numbers certainly didn't look like the performance listed on each fund’s detail section. The numbers just didn't add up. I was very disappointed and began to wonder if it made any sense to continue investing in these mutual funds.
Around this time I began to read more investment books and tried to become more financially literate. I was amazed how little I knew about personal finances and investing in general. A new world of possibilities opened up to me. I was also shocked how little some of these so called “experts” at local bank offices knew about investing. I began to shift my mutual funds to dividend stocks and started my dividend stock investment journey. I kept reading books as a way to gain more knowledge about personal finance and investing. Over the last 4 years I've read about 80 books and counting. The more I read, the less I seem to know. I felt that I was unconsciously incompetent and I wanted desperately to move up to the next stage of competence.
Looking back, it's unfortunate that I knew so little and invested in mutual funds. The high MER was a big part of why I wasn't getting decent returns. When the market was bullish I was paying the high MER and getting returns less than the MER; when the market was bearish, I was still paying the high MER. It’s a double whammy and I was in a lose-lose situation.
Clearly my experience with mutual fund investing left me with sour taste in my mouth. I wasn't happy with the return on my investments and I would have loved to change my investment history. But the past is past and I can only focus on what I can do today. Now if I were to start fresh today, this is what I'd do...
Instead of purchasing actively managed mutual funds through banks, I’d open an account with Questrade. I’d allocate a set amount of money every month or every quarter and purchase Canadian index ETF’s such as VCE or XIC. I’d also diversify my portfolio by purchase some US index ETF’s and emerging market ETF’s. Canadian Coach Potato has a great list of recommended ETF's and model portfolios. Questrade is a great discount broker since you can buy ETF’s for free. You don’t pay any commissions when you purchase ETF’s, only when you sell. This is great when you are only purchasing a few shares each time. In our case where we're only purchasing ETF's to build up our assets, Questrade's no commission for ETF's is an excellent deal.
In parallel, I’d also allocate certain amount of money each month aside. Once the money reaches a significant amount, say $1,500 or more, I’d use transfer the money into my Questrade account and purchase Canadian dividend aristocrats such as Fortis Inc (TFS), TD (TD), and Bank of Nova Scotia (BNS). I’d also consider diversifying my portfolio by investing in US dividend aristocrats such as Johnson and Johnson (JNJ), Coca-Cola (KO), or Procter and Gamble (PG). Investing in US dividend stocks in a non-registered account means I’d have to pay the 15% withhold tax but I can deduct this in my income tax filing later. Since US dividend aristocrats typically have a lower yield than the Canadian encounter parts, it's a good idea to invest in my RRSP account instead, to avoid the withhold tax.
I would also read as many books as possible and read all the great PF and investing blogs on the internet. There are a lot of good stuff to read out there, the only shortage is time.
Here are some perhaps lesser known books that I recommend:
Overtime once I establish a healthy base with index ETF’s, I’d shift my focus on individual dividend paying stocks. This way I’d have more control over what I’m purchasing and the overall investment returns.
What about you? Would you change my approach if you were to start investing fresh?