You might not want to hear it... but here are 7 inconvenient truths about investing:
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TAX CHANGES: Budget 2024
XEQT vs VEQT. Which ETF is better?
Add some STRESS to your retirement plan
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You might not want to hear it... but here are 7 inconvenient truths about investing:
--
TAX CHANGES: Budget 2024
XEQT vs VEQT. Which ETF is better?
Add some STRESS to your retirement plan
Connect With Evan
Hello and welcome back to the Canadian Money Roadmap Podcast. I'm your host, evan Newfeld. On today's episode, we're going to be talking about some things that may be a little bit uncomfortable. These are some inconvenient truths when it comes to investing. We're getting into the holiday season here and usually this is a time for positivity and hope, but this is maybe a little bit more of a negative episode if you want to see it that way. But I've seen a bunch of things online recently comments and questions and Reddit posts and things like that that just kind of make me shake my head, because people just don't necessarily know the whole story when it comes to investing and what should be expected and things like that. And so as professionals CFP professionals included, like myself I think it is prudent to make sure that we are telling the whole story and not just throwing out overly positive expectations. But you got to start investing so you can make millions of dollars Like well, here's the inconvenient truths and some of the realities of what it takes to actually be a successful investor over time. So I've got about seven here. I probably could have spent a lot of time doing a whole bunch more than that, but this podcast is generally quite positive, and so I don't want to dedicate tons of time to perhaps negativity here. But I do also think it is important just to set expectations reasonably, and hopefully these things will do that. Let's get into it. Number one of things that I believe are inconvenient truths when it comes to investing, or the stories you've been told about investing. Number one is low fees are not a silver bullet for all of your financial problems. Online, you can kind of tell who the people are that haven't spent a whole lot of time investing before they try to cater to the hive mind of, say, the Reddit thread or the Twitter commenters or things like that by saying, yeah, you know I did all this, but at least I'm sticking it to my parents financial advisor and I'm investing in low cost index funds. It's like great, that's fine. Low fees are great. I think that a diversified low cost portfolio should be the core of everyone's portfolio, or the vast majority of people's portfolio at least. But the cost savings on the management fee of your investments will not solve all of your financial problems. Low fees will not make up for a low savings rate. So if you're not saving enough already to meet your financial goals, decreasing your fees well, they might eke out a little bit more in terms of your return on your investment. The thing that makes the biggest difference over the course of your whole life is your savings rate from your own income, which requires your discipline. Decreasing fees will not make up for a low savings rate. Low fees will also not get rid of investment risk. I've seen this comment so many times saying oh, my investments are down, but I bought low cost index funds. It's like what do you think that means? It's like no, you're participating in the stock market. These are real businesses that go up and down. Just because it's low cost does not mean that there's no risk associated with it. By no means. It's not safe Over a long period of time. Your expected returns are positive and your odds of success are pretty good, but that doesn't mean that there won't be ups and downs. I'm going to get to that concept a little bit later. Low fees are not going to pay off your credit card. Low fees are not going to set up your beneficiaries properly on your accounts. Low fees will not buy you life insurance. Low fees will not choose the right plan types to use. Low fees will not reduce your tax bill. Low fees will not ensure you're diversified. Low fees will not help you avoid market timing or investing mistakes. But don't get me wrong. Don't misunderstand what I'm saying here. High fees do not solve those problems either, but low fees in and of themselves do not solve all of your financial problems. That is inconvenient for some people that are new to investing and think they've got it all figured out by buying an index fund. Good start for a very specific, small part of your financial life. That's a really good place to be. I'm not saying you have to work with a financial advisor to do any of those things. No, but that's part of a service, of what a quality advisor can do for you. A lot of those things you can do on your own, but they do require discipline and they require expectation management. I don't want to ramble on too long about number one here, so let's go into number two. Any long-term investment worth owning will go down at some point. This is the idea that any investment that has a positive expected return has risk associated with it, and risk can take many forms and you can come up with any definition you want, but the simplest way to just spell it out is that at some point it's going to go down in value. That might be tomorrow, that might be five years from now, but there's no long-term investment worth owning. That goes straight up. It just doesn't exist. So even though you might have rental properties and you don't see a price on your properties every single month, that doesn't mean that it hasn't decreased in value. Same thing with the stock portfolio. If you don't look at your statement, that doesn't mean it hasn't decreased in value at any point. So the more you look at things, the more worried you might end up being about it. But any long-term investment worth owning will go down at some point. Now that doesn't mean that every asset class that goes down is actually worth owning as a long-term investment. But this is just a simple concept of. For any type of expected positive return, there has to be some sort of risk associated with it. If there isn't, or someone is telling you there isn't, and there's some sort of miraculous free lunch, you might want to start asking some questions or just walk away entirely. So anything worth owning will go down at some point. Number three if you actually have a diversified portfolio, like I always talk about on this podcast, every year, every month, every day. Whatever, some part of your portfolio will always suck, right? Because diversification doesn't mean just owning five of the big tech companies that all go up and down at the same time. It doesn't mean all owning all the same small oil and gas companies that go up and down at the same time, right? So in a diversified portfolio, the correlation between all the things you own is not perfectly correlated, right? So if something is perfectly correlated, they will move in tandem. So if something goes up by 5% and then down by 5%, everything you own goes up by 5% and down by 5%. But if you have something that's lower correlation, that means that it's not going to move exactly the same at all times and sometimes when this be nice, if you could have parts of your portfolio actually be negatively correlated, which means if something goes up, the other thing goes down, and vice versa. Right, I don't want to get into the weeds too much on this one, but it's a simple concept of diversification. It might be an asset class, it might be an individual holding, it might be a sector, it might be a country, something like that. So even if you have a simple portfolio like an all-in-one ETF or a mutual fund or something like that. The components within there will not be all moving at the same time, right. So it's easier to see if you have a really complicated portfolio. But even within a very simple portfolio or a simply structured portfolio, parts of it will be up some years, parts of it will be down some years. This kind of leads me into my next one here. Number four of inconvenient truths is that someone you know will always have a better performing portfolio than you. Unless every single person that you know invests exactly the same way as you, then that might be true, but now, with the internet and people spending a lot of time talking about money on the internet, you're going to hear about people that have better portfolios than you do, and it's very unlikely that your entire portfolio will comprise the top performing asset of that year or that month or that decade, right. So your job as an investor one that tries to invest in an evidence-based way is that you don't want to try to keep up with the Joneses, or keep up with the person on the internet or the buddy at the Christmas party that is talking about how much money they're making, because you're only going to hear about your friends portfolios when they're in good shape. So this was classic last year. Here in Canada, we are victim largely speaking as a general population, just like every other country, but in Canada in particular of something called home bias or home country bias, where Canadians portfolios have a lot of Canadian stocks in them, as opposed to diversifying broadly around the world where there are more fish in the sea. So last year was a very, very unique year for the stock market, and one of the places that actually had some positive returns was in the oil and gas sector. I guess what Canada has a lot of. We got a lot of oil and gas, and so I had a few clients come up out of the woodwork just out of nowhere saying hey, a friend of mine is saying that he's invested in oil and gas stocks. Should we be doing that too? It's like I wonder why he's saying that. It's because it's up 60% this year and everything else is down 20. So, if you're curious, my answer to that client was because we're well diversified, we actually do have some exposure to oil and gas and we have a decent amount actually. So that doesn't mean you should be avoiding those things either, but there's always going to be someone that has a better performing portfolio than you and just trying to move to the next hot thing is actually moving to the last hot thing, and that usually doesn't work very well. So you need to get comfortable with the idea that you're not going to have the best performing portfolio at any given point in the hopes that over a long enough period of time, because you stuck with a proven strategy for a long enough period, that you actually will outperform them over a longer period. So in any given year this is true hopefully over a longer period of time, with good, sound investing practices, you can outperform some of these people, but that doesn't matter. This isn't a comparison game. This is about meeting goals. We don't want to compare everything. Number five inconvenient truths If you're reacting to things you read in the news, you're already too late. And part two of this inconvenient truth you don't know what the impact of those events are going to be. The big one is this this looming boogeyman of recessions. If you're looking at news headlines now saying, oh, there's a recession coming, guess what? Everybody and their dog has been hearing about this incoming recession for the last two years. So the way that the stock market works is that all buyers and sellers use all known information and all anticipated information and all average speculation to make decisions on whether they should buy and sell stocks. So because there are so many participants and so many dollars chasing expected returns, I am of the belief and there's a lot of academic evidence that says that market prices are reflective of all the known information and probably an average of all speculation. Is it exactly perfect at every single time? No, but it's pretty close. Dimensional funds does this cool experiment at some of their in-person events and it's the classic jellybean guessing games. So they got the big jar of jellybeans. You come in, you write down the number that you think it's going to be and the range of expectations or the range of guesses for how many they think is in the jar is super low, all the way to super high. But the cool thing is, every time they've run the experiment is that the average is actually pretty close. And so that is the idea of market prices, where some people are going to be wildly wrong in both directions. But when you get enough participants making those guesses and predictions, whatever, it ends up being pretty close. Rarely is it bang on, because no one knows the future. But again back to this inconvenient truth if you're reacting to things you read in the news that is known information that is already baked into the price, you're too late and you shouldn't be trading based on that anyways, because you would be surprised to learn that even when something appears to be bad news, sometimes the market has already priced that in before and it's already moved on to the next good news story going forward. Right, so the impact of news cycle. Things might be wildly different than what you expect, and if you're reading about it, if you're thinking about it, chances are millions of other people have already thought the same thing, and it's too late to make any sort of move based on that. So market prices in known information and reacts based on new information All the time. So don't make changes to your portfolio based on things you read in the news. Number six of inconvenient truths Making money in the stock market takes a long time and it won't happen every year. This is something that's really tough when you're first getting started, because it's like what am I even doing here? Because if you're contributing to your investments on a regular basis, you're starting from nothing. Put in a few hundred bucks every month or every couple of weeks or whatever, even if the stock market doubled like it's up a hundred percent in that year. This doesn't happen, by the way, but if it did, you still wouldn't really have that much money because you're just getting started. If you're doing a hundred bucks, a couple hundred bucks, whatever, if you put 5,000 bucks into the stock market and it doubles to 10, that's still probably 20% of your income for a year, like it's not gonna really make a massive, massive difference. And that's why it's like what are we doing here? It sucks. Getting started is really, really hard. I'm gonna have an episode about this and some of the math behind it. But making money in the stock market takes a long time and it takes a lot of dedication and it takes a lot of real dollars before it can really make a difference. And the hardest thing is that it won't even happen every year. Right, the stock market is not positive every single year. It's better than a coin flip, for sure, stock market is more positive than negative and there's a positive expected return for investing in stocks, but that doesn't mean it's gonna happen every year. So diversification helps. Periodic investing can help, for sure, but that's just an inconvenient truth that making money in the stock market takes a long time. Last one that was on my list here of inconvenient truths. Might spend a little bit more time on this one. But past performance is not indicative of future results. Everybody believes that it's on every disclaimer related to investing. Everybody says that. How many people believe it? I don't know. You tell me, if you go on a lot of forums and things like that, even here in Canada, go on Twitter, how many people say, yeah, you should just buy the S&P 500 because it's the best, or it performs better than so-and-so or the NASDAQ, right? Any idea why people say that? It's because it performed well recently. It's not because it's some magical thing. It's because it performed well recently. And so let's pull up some numbers. I went onto some software here and I looked up the returns from the previous decade. Well, I guess we're kind of into the third decade of the 2000s here. But if you go from January 1st of 2000, the turn of the millennium, I remember where I was and then you look out to the end of that year or, pardon me, the end of that 10-year period, so December 31st of 2009. Any idea what the S&P 500 or the NASDAQ look like during that period of time I will spare you the math the S&P 500 during that period of time had a total return of negative 24% for a 10-year period. It averaged a loss of 2.5% per year for 10 years. The NASDAQ hold onto your hat down 50% over a 10-year period. This was not that long ago, folks. This is not. We're not talking about the 20s or the 30s or the 70s 80s. Even this was very, very recently. The NASDAQ was down 50%. An average of negative 6.5% per year for 10 years and a lot changes in the subsequent 10 years. This is not saying you gotta buy the last decades losers. No, this is saying stay diversified, because you don't know and those periods of time can be long. So committing to one specific asset class. So the S&P 500 represents Large cap companies based in the United States. That's a really small portion of the investable world. These are big companies that you know. They're doing a lot of business, don't get me wrong. They represent a good chunk of the investable economy. It's not everything. Canadian market, for example. I'm not saying you should have all of your money in Canada, but this is as good of a argument for diversification as I can come up with on the spot here. During that period of time when the US market was broadly negative for a decade, the TSX so the Toronto Stock Market Index was up 40% during that period of time, so an average of about three and a half percent per year. So we were definitely exposed to some of the negativity that came around what we call the tech wreck in 2000 and US housing crisis in 2008, and there's a whole bunch of Problems that came along with both of those periods of time that are kind of bookending this decade. This kind of stuff happens and so when people say, oh, you know, past performance is not Indicative of future returns, that's why I buy the S&P 500. It's like, well, you can do better than that, you can have more than that, you can be more diversified than that. So I'm not hating on the US market by any means or the S&P 500 or anything like that. It's just to assume that it will continue to outperform forever. It's just ludicrous, it's just not gonna happen. I'm not gonna pick a date or time where it's gonna stop doing that. I guess last year was as good a time as any same kind of thing. Last calendar year, january 1st of 22 to December 31st of 22. Nasdaq was down 33% during the one-year period. S&p 500 was down 19 and a half percent. Tsx was down 8%. Okay, these are not advocating for one or the other, I'm just saying a diversified portfolio would have kind of a middle-of-the-road experience, takes out some of the edge a little bit and does not expose you to the extreme ends of Outperformance or underperformance over any period of time. So anyway, so I'll stop rambling here. But for many people that is an inconvenient truth that they're gonna learn a relatively hard way. Let's review here. Number one low fees are not a silver bullet for all of your financial problems to any long-term investment worth owning. We'll also go down at some point, aka have some risk. Three if you're diversified, some part of your portfolio will always suck for, so when you know, will always have a better performing portfolio than you. Five if you're reacting to things you read in the news, you're already too late and you don't know what the impact those events are gonna be Positively or negatively on the stock market. Six making money in the stock market takes a lot of time and it won't happen every year. And seven past performance Truly, is not indicative of future results. So this is a little bit of a tough love episode, but maybe for those of you that are listening to this podcast, these are completely irrelevant. But no, these are always things that we need to be aware of In our own investing lives, because it's hard, you know, when you see something that goes up a lot recently, it's like maybe I should have a piece of that, maybe I should have a little bit more of this, got to start asking yourself some questions to make sure you're not falling into any of these traps. But let me know what you think of this episode. Shoot me an email at podcast at Evan newfield calm. I'd love to hear from you. I've got lots of great emails recently. Thanks to all of you have reached out with plenty of kind words and questions and things like that. I'm hoping I can do another Q&A episode here sometime soon. Thanks so much for listening and we'll see on the next week's episode. Thanks for listening to this episode of the Canadian money roadmap podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors before making changes to your financial plan. Evan newfield is a certified financial planner and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.