***** First off, I am not a licensed financial advisor. I don’t hold any of the designations and I’m not an expert in telling people which investments are best for their particular situations. This post is about what has worked for me. It is in no way a guarantee, warranty, or promise that my chosen investment products will work just as well for you.
Now, with that out of the way, let’s get to it…
I’ve used the buy and hold strategy for my entire investing life. This strategy is far less risky than trying to time the market. Market timing as an investing strategy is too intense for my tastes, so I don’t do it. I have little faith in my ability to buy the perfect stock at the perfect time and to also sell it at the optimum moment. In hindsight, I can confidently state that the buy and hold strategy has worked exceedingly well for me. This is most likely due to the fact that I’m something of a passive investor and this method required very few decisions from me. These were the 4 main questions that I asked myself when I started oh-so-many-moons ago.
- How much would I commit to investing from every paycheque?
- When would I set up my automatic savings plan?
- Which exchange traded funds did I want to buy with my automatic savings?
- Would I be willing to increase the savings amount each time I paid off a debt or got a raise?
That’s it. Those were the questions that helped me to put my buy and hold investing strategy into action.
Question 1 – How much?
I started my investment journey with $50 from each paycheque. It was easy at the time. I was living at home, so my parents paid for the majority of my life. I had to cover my entertainment with money earned at a part-time job. Everything else was paid for by my folks. That $50 was roughly a third of my bi-weekly paycheque, but I’ve never been a big spender so it wasn’t a hardship.
As I finished school and moved into my career, that savings amount went up. Since I’m a person who drives my vehicles for a very long time, I have years and years between car loans. I kept my Oldsmobile Alero for 8 years, and the loan lasted for 5 of those years. The Alero was eventually replaced by an SUV, whose loan was paid off in 6 months. I kept my SUV for 14 years, and would still be driving it but for knee problems that make it kind of unsafe for me to be working a clutch in traffic. (I still love my SUV and made sure that it went to a good home when I sold it.) Last fall, I purchased my current vehicle in cash. It was a big sum and I didn’t particularly enjoy handing it over, but I really, really, really hate car payments.
Once they were eliminated, former car payments were directed towards my investment accounts. They became RRSP and TFSA contributions. Within a few years of ridding myself of car payments, I was able to make the maximum annual contributions to both my RRSP and my TFSA. No more big rollover balances for this Blue Lobster!
The same thing happened after I paid off my mortgage – my savings amount shot up again! Think about how much you pay for your mortgage or rent. If you didn’t have to pay that every month, don’t you think it would be easier to find the money to invest?
Today, I’m at a very comfortable bi-weekly savings rate, many times higher than the one I started with so long ago.
Question 2 – when to start the automatic savings program?
“Right now.”
In my case, that’s not exactly true. When I was saving my $50 every two weeks, I would actually go to a bank machine and to the transfer myself. (Yes – I’m older than online banking.) I would punch in my numbers and manually transfer the money from my chequing account to my savings account. At the time, I was in high school so I didn’t know about exchange traded funds or mutual funds, or other kinds of investment products. All I knew about were savings account so that’s where my money went.
When online banking became a reality in my life, one of the first things I did was set up an automatic transfer. The money from each paycheque was sent where it needed to go. I’ve had the benefit of using automatic transfers for more than half my life. This means that I don’t have to face the choice of whether to save & invest my money every time I get paid. That question was asked and answered decades ago. No need to ask it again.
As the years passed and I learned more, I put more automatic transfers in place so that each of my priorities and goals could be funded. My RRSP and TFSA contributions were invested in the securities I had chosen. My buy and hold strategy went into action, and I didn’t look back.
Question 3 – What did I buy?
Ah… now we come to one of my biggest investing mistakes. I invested in dividend-paying mutual funds… then, later on, I switched to dividend-paying exchange traded funds (ETFs). The switch occurred because ETFs have management expense ratios that are so much lower than those that come with mutual funds. The management expense ratio (MER) is the on-going cost paid for owning mutual funds and ETFs.
Words to the wise – the MERs on mutual funds are almost always higher than the MERs on ETFs.
I thought of my dividend-paying securities like anything else. Why pay more for the same thing? If I can buy the same 2L carton of milk for two different prices, then I’m going to buy the one that costs less. The same logic applied to my investment products. When I learned about ETFs, I made the switch and didn’t look back.
For decades, I invested my money each month into dividend-payers. My thought was to ensure that I had a steady stream of income in retirements. Dividends receive favourable tax-treatment, i.e. they’re taxed must lower than interest earned on GICs or employment income. Secondly, I could participate in dividend re-investment programs (DRIPs). This meant that all of my dividends were automatically re-invested into buying even more dividend-payers. Compound growth for the win!
Sounds like a great plan, right? Well, I should have been investing into straight equity products. The stock market’s return outpaced what I earned from my dividend-payers. Even with the volatility of a regular stock market, and the crashes that happened in 2001, 2008 and 2020, I would have been so much farther ahead if I had just invested in straight equity ETFs.
Ah well… coulda, woulda, shoulda…
My saving grace lies in the fact that I was using the buy and hold strategy.
- Was I buying the wrong thing? In hindsight, yes.
- Did I hang onto my investments once purchased, and thereby benefit from compound growth? Again, also yes.
- Has the buy and hold strategy worked wonders for me despite my big mistake? Yes!
Question 4 – did I increase my savings amount over time?
You bet your sweet patootie I did!
When I was younger, I had a lot more debt. I graduated with student loans, and I’ve taken out 2 car loans in my life. On top of that, I had a mortgage. My employer has given me raises over the years, but none of those matched inflation.
The “extra” money for my buy and hold strategy always came from not replacing one debt with new debt. Once my student loans were gone, that money was available to be invested. As my car loans and my mortgage were paid off, that money was also re-directed towards my investments.
Now, I’m going to admit that I used part of each former payment to bolster my day-to-day living too. I think I was paying $650 or $750 every two weeks for my mortgage way back in 2006. (And I realize that those numbers are downright paltry compared to the mortgage payments some people are paying today.) However, at the time, they were a big chunk of my paycheque so I was glad to see them go.
At the time, I chose to send $500 of each former payment to my investments and the remainder – whether $150 or $250 – stayed in my chequing account for the little extras. In short, each time I paid off a debt, I re-directed the majority of that former payment to my wants while the bulk of the payment went to my investments. No one is promised tomorrow, but that’s no excuse not to save for it.
The buy and hold strategy has worked exceedingly well for me. I have no reason to believe that it won’t work for you so long as you have a little bit of money to invest. You need not be an expert to start investing. It’s okay if you learn along the way. I did. I had to make tweaks here and there, as I grew more knowledgeable. They key was to start and to never stop. If you have a few bucks to invest each month, you should do so.