Mutual fund investing, what I would do differently today

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:

Wealthing Like Rabbitsby Robert R. Brown

The Behavior Gap by Carl Richards

How to eat an elephant by Frank Wiginton

The Single Best Investment: Creating Wealth with Dividend Growth by Lowell Miller

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?

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34 Comments

  • Reply
    Amber Tree
    July 13, 2015 at 10:57 am

    hey tawcan,

    this sounds like a familiar story. I also made my first investments in funds recommended by the bank… It took years to change to an index investment style (although I on purpose keep some mutual funds: not for their performance, but for their past performance that fits my investments needs in that part of my portfolio)

    I like the idea to build up dividend stocks next to an index portfolio. That is my plan for the coming years as well.

    If I would start all over again: it would be simple: a 50/50 stock/bond before buying a house and the to a more aggressive 70/30 till I have reached my freedom goals.

    • Reply
      Tawcan
      July 15, 2015 at 9:36 am

      Hi Amber Tree,

      That fresh start plan sounds like a good one. Seems that we shared similar investing story with the bank too.

  • Reply
    Baryy @ Moneywehave
    July 13, 2015 at 12:52 pm

    Wealthing Like Rabbits was a fun read. I quite enjoyed it.

    I’m glad I got out of mutual funds after a few years. I eventually switched to TD e-Series funds but now I’m mainly in ETFs

    • Reply
      Tawcan
      July 15, 2015 at 9:36 am

      Hi Barry,

      Wealthing Like Rabbits was indeed a fun read, it was amusing yet very informative.

  • Reply
    Our Next Life
    July 13, 2015 at 3:25 pm

    Sometimes it’s easier not to think back to those years wandering the wilderness! Like you, we also invested in high fee funds, as well as buying some individual stocks not very wisely, just because it felt like investing was the right thing to do. Now our taxable accounts are almost 100% Vanguard index funds and bonds, which we’re happy with. Our retirement accounts are still primarily actively managed mutual funds, because we have no choice, but as soon as we retire in 2 1/2 years, we’ll roll those over to lower fee funds!

    • Reply
      Tawcan
      July 15, 2015 at 9:37 am

      Hi Our Next Life,

      We all have to learn from our past experience to become wiser. Makes sense to switch to lower fee funds in your retirement account once you retire.

  • Reply
    Income Surfer
    July 13, 2015 at 5:14 pm

    Thanks for sharing your journey Tawcan. My journey was much like yours. I didn’t know what I didn’t know, and I wasted a lot of time listening to the talking heads on the Street. Fortunately, I’m a voracious reader and began to learn as I read. Equally fortunate, I didn’t have much to invest as a teen and in college, so I didn’t have much to lose. Those first few thousand bucks I “invested” in an actively managed mutual fund, were some of the best education money could have bought! I wouldn’t change a thing.
    -Bryan

    • Reply
      Tawcan
      July 15, 2015 at 9:38 am

      Hi Bryan,

      Great that you read a lot and learned quickly and changed your investing strategy relatively quickly.

  • Reply
    Vivianne
    July 13, 2015 at 8:04 pm

    I hear vanguard get the lowest mutual fund fees, so when I signed up, I signed up to each category 1 small, 1 mid, 1 large cap, etc. but even with vanguard high trading volume, the fee was still 1-2% regardless how the market was doing 2007-2009 small cap mutual fund didn’t come back at all until 2012. I’d be better off investing in index fund. I didn’t know it was available.

    Also, during the 2010 the government forced institution to disclose the fees incur, up until this point, I wasn’t very sure how much fee was taken from my account.

    Thanks to the financial crash, the FED really step up and regulate the financial institution and financial firm. The trend is there will be more dyi investors.

    • Reply
      Tawcan
      July 15, 2015 at 9:38 am

      Hi Vivianne,

      It’s great that the government is making rules to help investors like us. That’s very important. I almost think there should be more rules to make sure people don’t waste their money unwillingly.

  • Reply
    Adam @ AdamChudy.com
    July 13, 2015 at 9:18 pm

    I just reviewed the One Page Financial Plan. I thought it was fantastic.

    No shame in making some bad decisions day 1. Important thing is you kept saving consistently and kept learning.

    • Reply
      Tawcan
      July 15, 2015 at 9:39 am

      Hi Adam,

      Saw your book review, definitely need to read One Page Financial Plan.

  • Reply
    Jason @ Islands of Investing
    July 14, 2015 at 1:05 am

    The best thing about all this is that you kept at it, educated yourself and went on to make even better decisions that suited you much better. I think most people end up learning some investing lessons the hard way, so better just to get started, learn from experience and keep educating yourself along the way!

    • Reply
      Tawcan
      July 15, 2015 at 9:39 am

      Hi Jason,

      I think learning the hard way is the best way to learn. No shame about learning things the hard way.

  • Reply
    Hannah
    July 14, 2015 at 5:22 am

    I still consider myself a beginner investor, so we invest mostly in index funds. However, we’ve also have about 30% of our portfolio in mutual funds. This includes in a few international mutual funds (for diversification), and in a few sector based mutual funds (tech and energy). The performance on these hasn’t been great, but I am happy for the diversification.

    If I found investing in the stock market any more interesting, I am sure I would take time to learn more.

    • Reply
      Tawcan
      July 15, 2015 at 9:40 am

      Hi Hannah,

      Investing in mutual funds are fine as long as the MER is not outrageously high.

  • Reply
    Mr. SSC
    July 14, 2015 at 6:17 am

    I’d say that sounds like a reasonable approach. Especially with educating yourself, and staking steps to correct the mistake. I cashed out a 401k once, so we are all prone to falling victims to ourselves and our ignorance. It’s how we recover that’s important.
    We pretty much use all Vanguard funds for our personal investments. Their mutual fund expense ratio is pretty low, and Mrs. SSC switched some funds around and got the same type of accounts with even lower expense ratios.

    • Reply
      Tawcan
      July 15, 2015 at 9:40 am

      Hi Mr. SSC,

      Vanguard is a great institution. Bogle is a great guy for starting Vanguard.

  • Reply
    Stephanie@the Money Savvy Blog
    July 14, 2015 at 11:18 am

    Mutual funds are not evil per se. Actually, they are a good starting point if you don’t have a lot of money to invest.
    A lot of financial institutions now have ” D.I.Y.” mutual funds (series D) with lower MER.
    I also made the same mistake as you did. I went to my bank and also bought “that great mutual fund with a 2.6% MER and a 5% return before MER”. Then, I started educating myself and realized I could be in charge of my investments and earn higher returns. Liberating!
    I am still learning, but my investments are in a better place.

    • Reply
      Tawcan
      July 15, 2015 at 9:41 am

      Hi Stephanie,

      Not saying mutual funds are evil but there are better mutual funds with low MER people should use, instead of the active managed high MER funds. What’s worse is the fact financial advisers are pushing/selling these high MER funds so they can get paid.

  • Reply
    BeSmartRich
    July 14, 2015 at 2:10 pm

    I started off as mutual funds as well and I regretted it. I wish I could have known what that was and that other options are available such as ETFs and dividend investing. Luckily, I realized my mistake not far after I started investing (2-3 years) 🙂

    • Reply
      Tawcan
      July 15, 2015 at 9:42 am

      Hi BeSmartRich,

      Good thing you didn’t spend 10+ years in mutual funds. Great that you made the switch.

  • Reply
    Dan @ Our Big Fat Wallet
    July 15, 2015 at 11:22 am

    I started out investing in mutual funds as well, luckily I got out within a year or two. The fees were crazy high, around 2.5% MER, and at the time I didn’t know any better

    • Reply
      Tawcan
      July 16, 2015 at 10:43 am

      Hi Dan,

      Sounds like we have similar experience… just like so many people.

  • Reply
    dipu
    July 16, 2015 at 7:12 am

    Hi Tawcan,

    Thank you for sharing your knowledge and success story. I am glad that I came across your blog especially you are in Canada. This is so helpful and inspire me to learn more. I am quite new to stock investing I gave up quick buy n sell strategy after some heavy losses and now only considering long term dividend income as the key strategy . I have TFSA a/c in questrade which has both us and canadian dollar. I recently purchased us healthcare REIT OHI and looking to get some great us dividend stock in future but i am not sure about the tax consequences. Reading over your prior blogs it looks like I would get 15% tax on us dividend income I don’t have RRSP a/c If i open RRSP a/c to get some US dividend stock how will that benefit me compared to tfsa. could you please help me learn this.
    2. I also have some canadian stocks in my questrade tfsa but the small amount of dividend i get is not automatically reinvested. Considering that its a small amount if I request quested to automatically reinvest on the stocks i choose I might just be paying the trading fee over and over again. what is the best way for it. Do i just reinvest on my own. I would very much appreciate if you could share some knowledge and your advice

    • Reply
      Tawcan
      July 16, 2015 at 10:48 am

      Hi dipu,

      Thanks for the comment & questions, let me see if I can help answering your questions.

      1. Regarding holding OHI in TFSA, yes I believe you’ll get hit by the 15% withholding tax but possibly more because OHI is a REIT. The thing with investing US/international TFSA is that you can’t claim the withhold tax in your income filing. If you hold OHI in RRSP you won’t get charged on the witholding tax.

      2. If you’re using a discount broker, they typically only support synthetic DRIP, meaning you need to receive sufficient dividend to purchase a whole share of the stock. For full DRIP where you can purchase partial shares, you need to enroll through a transfer agent or use broker like ShareOnwer. For DRIP the brokers typically do not charge any commissions. If you’re only getting small amount of dividend, you’re better off waiting till you have sufficient amount of money to trigger a buy.

      Hope this helps.

  • Reply
    dipu
    July 17, 2015 at 6:14 am

    HI Tawcan, Thank you so much for taking the time to answer my question. I will definitely have to start an RRSp a/c now. Thank you again.

  • Reply
    HMB
    July 17, 2015 at 8:12 pm

    I think the takeaway from this is that you learned and adapted. Many people do neither and suffer the consequences. It’s good that you learned this early in life instead of later. I can also identify with your sentiment of the more you learn, the more you see how little you really know. Constant learning is the only way to grow as a person and you seem to be doing great! Thanks for sharing.

    – HMB

  • Reply
    dipu
    July 18, 2015 at 1:55 pm

    HI Tawcan,

    I went to the TD bank to discuss about opening RRSp account. I haven’t opened the account yet but here are the things I came across. OUT of 3 types of TD RRSP category In order for me to buy and hold any stocks or efts I would have to have TD self directed investment RRSP.
    Unlike my Questrade TFSA a/c in this RRSP i won’t be able to hold both US dollars and canadian dollar all transaction has to be done in canadian dollar that means if I have to buy US securities I would have to buy this in Canadian dollar pay the exchange rate difference and the commission fees (despite that I might have US dollar sitting in cash)
    -there is also an account inactivation fee if I don’t have atlest 30 trades in a quarter
    but if minimum 25k investment fee is waived.
    -There is a $100 flat rate fee every year regardless fin order to keep TD investment RRSP
    Do you have any suggestions considering that I only have around 5 k in us dollar for investment and around 20k in Canadian dollar If I start buying US securities through RRSp I would end up paying the huge difference in exchange rate plus the flat fee and also in activation fee.I would really appreciate your information on this. Thanks a lot

    • Reply
      Tawcan
      July 19, 2015 at 8:19 pm

      Hi Dipu,

      I don’t like TD self direct RRSP account, that’s why I went with Questrade. With Questrade RRSP you can hold both US and CAN currencies and there’s no “self-direct” fee.

  • Reply
    Dipu
    July 20, 2015 at 1:49 pm

    Thanks a lot Tawcan. I’ll check with Questrade.

  • Reply
    Andrew@LivingRichCheaply
    July 22, 2015 at 10:09 am

    If I were to go back in time I’d stick with low cost index funds. In the early years, I was chasing returns by investing in hot stocks and hot mutual funds. I learned my lesson and realized that I was better off investing in low cost index funds. I took a major haircut with internet/tech stocks during the stock market crash in 2000.

  • Reply
    Xyz from Financial Path
    August 11, 2016 at 4:31 pm

    I started with Questrade too, great way to invest at every paycheck without paying too many fees

    • Reply
      Tawcan
      August 14, 2016 at 1:56 pm

      Really like Questrade myself as well.

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