Since having our financial epiphany in 2011, we have changed how we view our finances and most importantly, how we invest our money. Dividend growth investing and index investing became our focus. As a result, the value of our dividend portfolio grew over the years and our dividend income went from $675.21 in 2011 to $42,305.81 in 2022. This year we’re on track to hit $49,00 in dividend income.
That’s a lot of progress in 13 years. Starting this blog and sharing our financial independence journey has been one of the best things I’ve done. I’m amazed at how many like-minded people I’ve been able to connect with and meet.
Many people are fascinated with our financial journey. I’m also very thankful for all the encouragement I have received from readers and other bloggers. Now, a small minority may consider that by writing about our FI journey and dividend income, I’m boasting about our financial success and being arrogant.
It’s unfortunate that some people think that way. Quite frankly, I don’t have the power to decide how people think about me or about this site. However, the reason I’ve kept writing this blog for over nine years is definitely not to boast about our financial successes. I wanted to chronicle our FI journey, help other people, connect with other like-minded people, and show it is possible to reach financial independence by having and sticking to a plan.
When I reflected on why some people may think that I’m being arrogant, I realized that perhaps I’ve been writing too much about our financial successes. Let me get something straight here. While we have had financial successes, I definitely have had my share of investment mistakes and failures as well.
Here are some of these mistakes and failures.
Buying mutual funds
One mistake I’ve made is buying mutual funds instead of buying dividend paying stocks or index ETFs.
Although I started investing early in my early 20s, I was buying mutual funds that bank financial advisers were recommending. I knew that minimizing Management Expense Ratio (MER) was a good idea but I’d often get persuaded by these “financial advisers” to go with actively managed funds. Simply because these funds had better historical returns.
Unfortunately, the actively managed funds also happened to have much higher MERs than mutual funds that tracked the different indexes. For some odd reason, I kept repeating this mistake again and again, even after reading books like “A Random Walk Down Wall Street.” I was not willing to do my homework and take charge of my own finances.
Instead, I wanted someone to look after my money and manage it for me so I didn’t have to.
I was lazy. I didn’t want to take the responsibility for my money.
Investing in actively managed mutual funds meant I was paying a large amount of fees.
What I should have done instead, was to invest my money in dividend growth stocks or simply invest in index ETFs. If I had purchased dividend stocks like Royal Bank, TD, Visa, and Johnson & Johnson over 15 years ago, I’d be sitting at a very comfortable yield on cost for these stocks, collecting great dividend payouts every quarter.
Likewise, index ETFs have much lower MER than most mutual funds. Even a small 0.5% difference in fee can make a HUGE difference in the long term.
If I were in my early 20s and starting to invest today, I’d forget about mutual funds and simply invest my money in one of the all equity ETFs.
One of the important lessons I learned as part of this failure is that the best person to manage your own finances if YOU, not someone else. Take charge of your own finances today. Don’t rely on someone else.
Not having a long term view
Another major failure I made in my early 20s was not having a long term view. I was too impatient.
When I entered the workforce after graduating from university, life was good. I was making more money than I ever had before. Since I had money left over each month, I decided to start investing money in the stock market by purchasing mutual funds (big mistake, see failure above).
Then the financial crisis hit in 2008. As a result of the financial crisis, the stock market crashed. Since I had some spare cash lying around, I thought I’d take advantage of the down market by buying some top Canadian dividend stocks. One of the stocks I purchased was Royal Bank.
I purchased Royal Bank (RY.TO) at a heavily discounted price. My original plan was that I’d wait for the market to recover.
In case you’re wondering, I bought 100 shares of Royal Bank at $26.92 on Feb 26, 2009. I thought I purchased at an all-time low. All I could think of is to sell Royal Bank at a later date and get a nice profit.
Back then I didn’t know the power of dividend growth investing so I didn’t pay any attention to the fact that Royal Bank was paying a juicy yield.
The stock recovered a bit in early March but then the market started dropping again. Panicked, I decided to sell all 100 shares on March 3 at $29.05 to take in a small profit. I thought I was a genius.
Little did I know that the stock price would continue to climb after my sale. (Side note, after years of DIY investing, I learned that you simply cannot predict the bottom or the top of a stock).
Today, Royal Bank’s share price had appreciated by over 4.5 times if I had kept those 100 shares. I would have also received a nice amount of dividends since 2009. At the current dividend payout of $1.35 per share, that means my cost on yield would have been a jaw-dropping 18.6%!
Looking back, I definitely wish that I had held onto Royal Bank and used all the cash I had available to buy all the big 5 Canadian bank stocks during the financial crisis.
There are a few mistakes I made with this example of not taking the long-term perspective. One, I failed to realize that the likes of Royal Bank, The Bank of Montreal, CIBC, The Bank of Nova Scotia and TD all have been paying uninterrupted dividends since the late 1800s. I didn’t do my homework to learn about this important fact.
Furthermore, I failed to look at the big picture and the macroeconomic picture. While the financial sector was heavily hit during the financial crisis, Canadian banks were very well managed and didn’t have any danger of collapsing, unlike their American counterparts. I should have used the financial crisis as an opportunity to load up on Canadian banks.
Had I adopted a more patient, long-term view, I would have realize the all the major banks would have recovered, saw their stock prices rise substantially, and their dividends grow considerably. It is essential that you adopt that kind of long-term view if you are to be a successful investor.
Fortunately, I learned from this mistake and decided to take full advantage of the COVID-caused-market-melt-down in 2020.
For some reason, I seem to keep making this mistake over and over again. Perhaps setting an annual dividend income goal somehow makes me chase higher dividend yield, higher risk dividend paying stocks subconsciously.
Back when we started investing in dividend paying stocks, we purchased the likes of Liquor Store and EnergyPlus. Both were yielding north of 5%, possibly higher. Not very knowledgeable back then, I didn’t realize such a high yield was not sustainable.
I made the same mistake around 2019/2020 when I started loading up on Inter Pipeline. While I knew Inter Pipeline had some debt issues and was facing some headwinds with the Heartland Petrochemical Complex Project, I ignored the potential warning signs, convinced myself the high yield was sustainable, and purchased more shares of Inter Pipeline.
When the crude oil price started dropping like a stone and the entire oil & gas sector started to crumble during the COVID-19 pandemic lockdown, it became obvious that Inter Pipeline’s only solution to improve its financial outlook was to reduce its dividend payout significantly.
The 72% dividend reduction by Inter Pipeline didn’t come as a surprise to me but it did hurt us by reducing our annual dividend income by over $1,000, due to the high number of shares we held.
The saving grace, somewhat, was Inter Pipeline getting aquried by Brookfield Inferstracture, which caused IPL’s stock price to increase slightly when we eventually closed out the position.
Similarly, I made the exact same mistake with Algonquin Power & Utilities. When I first started researching AQN, I was also surprised by the amount of debt AQN had. But I ignored that warning sign because so many other dividend investors were buying AQN at the time.
Just like Inter Pipeline, ignoring Algonquin’s considerable debt was a major failure on my part. They also were in the process of acquiring Kentucky Power which would require them to take on even more debt. Compounding the problem was that quite a bit of the company’s consolidated debt was subject to variable interest rates. When interest rates started going up, this negatively impacted AQN’s financials.
In AQN’s case, there were quite many red flags that I was ignoring. I was too focused on the high yield, which bit us in the rear end when the company announced a dividend cut…
Paying too much attention to analysts
Another failure I made was paying too much attention to analysts and believing all the things they said. Much of that commentary is simply ‘noise.’ For example, one-year price targets are really wishful thinking a lot of the time.
When I first started DIY investing, I used to look at analysts’ estimates, price targets, and recommendations. Is the stock a buy, a hold or a sell? I would then base my buying decision solely on these analysts’ recommendations.
More importantly, I would pay so much attention to the target price and believe that the stock would absolutely hit that target price. I’d make plans in my head about selling the stock and how much profit I’d make and how I’d spend that money.
I was way ahead of myself!
Over time, I realized the analysts may not know all that much more than the average investors like you and me. These analysts are using financial numbers and tools to come up with their recommendations. But even with all that knowledge, the analysis is right only 50% of the time.
I learned that it is vital to do my own research and analysis. It is also very important to understand if the company has any moats to fight off competition. Being able to look at the big picture (i.e. macroeconomics) is important as well.
I also realized that most of these analysts are analyzing stocks and providing recommendations from a short term point of view. They might be providing a “sell” recommendation simply because the stock price is trending down, not because the company is facing some macroeconomic challenges and most likely will recover a few months down the road.
Summary – My investment mistakes & failures
I certainly have had my share of investment mistakes & failures. This is totally expected. As investors, we will always make mistakes and have failures. Just as no investor has a 1.00 (i.e. 100%) batting average, none can accurately predict a stock’s low (in order to buy it) or a stock’s high (in order to sell it) all the time. The key is to limit them and limit your losses.
More importantly, it is important to learn from your mistakes and failures so you don’t repeat them and continue to lose money as a result.
Dear reader, have you made any investment mistakes & failures that you’d like to share?