This week, I heard a statistic on YouTube that 49 is the average age for people to become a millionaire in the United States. I can only assume that it’s approximately the same for Canadians. Speaking from personal experience, that statistic is bang on. And I managed to do it while making some very big mistakes.
Mistake #1 – Buying mutual funds instead of exchange traded funds
When I first started investing, I bought mutual funds instead of exchange traded funds, i.e. ETFs. One of the reasons for this was that ETFs were not widely known in Canada at the time. I can’t be faulted for working with the information I had at the time.
Where I can be faulted is for continuing to invest in mutual funds after I learned about ETFs.
See, the only beef I have with mutual funds is their price. The management expense ratios, aka: MERs, of mutual funds is always higher than the MER of the comparable ETF. Investors have to pay MERs to the financial institutions that offer mutual funds and ETFs. Fine – people need to get paid. I understand that.
However, there’s no evidence that paying higher MERs results in better outcomes for investors. If anything, it’s the opposite. Paying higher MERs means smaller portfolio values for investors.
Over a long-enough timeframe, the difference in MERs can mean seeing hundreds of thousands of dollars less in my portfolio. That’s a very bad thing. It means that investors paid more for management expenses and wound up with less money. Check out this calculator and play with the numbers for yourself if you don’t believe me. Adjust the expense ratio and you’ll appreciate difference there is between an MER of 2% and an MER of 0.5%. The money that doesn’t go to the final institutions is money that stays in your portfolio.
Eventually, I realized that keeping my investments in mutual funds was only hurting me. So I sat down, completed the necessary forms (which took about 10 minutes), and sent the proper instructions to have my money moved into ETFs. I have never regretted my decision to make the switch.
Mistake #2 – Investing for dividends instead of for growth
This mistake happened because I’m an inherently lazy investor. The idea of passive income via dividends appealed to me! I wouldn’t have to work and money would still come to me?!?!! Once I’d understood what dividends were and how to get them, I couldn’t invest in dividend-producing assets fast enough.
So, instead of investing in equity-based mutual funds and ETFs, I invested in the dividend equivalents. Every month, I earned a few dollars. Eventually, I was earning hundreds of dollars each month. That sum crossed the 4-figure amount. Today, my dividends are enough to cover all of my basic annual expenses for food, shelter, transportation, and clothing. There’s even enough to cover some of my wants, stuff like short trips, concerts, and theatre tickets.
I try not to think about the fact that I would’ve been able to retire 5 years ago if I’d invested that same money into equity-based products. By investing solely in dividends, I missed watching my portfolio benefit from the 11-year bull run in the markets that happened between 2009-2020. If I’d invested in growth ETFS, my money situation would be so much better. I can only imagine that my portfolio would be worth double – maybe even triple! – what it is now.
I corrected my mistake in October of 2020. As the stock market was recovering from the pandemic, I tweaked my investment plan. (I should’ve made this move in April of 2020, but… coulda-shoulda-woulda, right?) Instead of investing in dividend-generating ETFs, my contributions are directed towards equity-based ETFs. The difference its made to my portfolio is remarkable. Even during the downturn we all saw in 2023, my portfolio was happily chugging along. I’ve more than recovered what I lost during the steep market declines of 2020.
Mistake #3 – Not understanding the 4%-rule
Admittedly, it can take me a very long time to understand certain things. For example, I still don’t understand the importance of the P/E ratio when assessing stocks. However, I’m not a stock-picker so I don’t worry about this blank spot in my understanding of investing. If I ever do decide to become a stock-picker, I’ll study the topic of P/E ratios and go from there.
One of the investment concepts that had me stumped was the proper application of the 4% rule to my portfolio. I didn’t understand how to use the percentage to fund my retirement. Sure, I could appreciate that 4% of $1,000,000 is $40,000. What I didn’t understand was whether that $40,000 came from the $1M-principal amount or did it have to come from the earnings generated by that principal? And what was I supposed to do if my portfolio had an annual return of less than 4%?
In other words, I always wondered what the 4% represented. Was I supposed to be taking 4% out of my portfolio’s principal every year in retirement? Or was I supposed to aim for an annual return of 4% and then only withdraw those earnings?
Roughly 5 years ago, I started to fully understand that the 4% rule traditionally means taking out 4% of the principal value of one’s portfolio and living on that amount. The 4% rule is meant to effectively decrease the value of one’s portfolio so that a person can pay for food, shelter, and living expenses in retirement.
So if I started with $1,000,000, then I’d take out $40,000 and leave the remaining $960,000 invested. Hopefully, the remaining $960,000 would still be earning 6% or more. Then, those earnings would be added to the $960,000. The following year, I would withdraw 4% of $960,000+earnings (whatever that amount wound up being)… The remainder after year 2’s withdrawal would remain invested to earn more money, and then I’d repeat the cycle in year 3.
This is not a bad strategy. It does mean that the portfolio is canabilized a little bit each year. Also, if the annual return is less than 4% in any given year, then the value of the portfolio decreases faster than the investor may want it to.
That said, my personal goal has always been to live on the dividend income earned from my portfolio. By living on the earnings, my portfolio remains intact. In other words, I don’t have to sell my portfolio in 4% chunks every year. The assets within my portfolio will continue to benefit from compound growth and my earnings should increase accordingly.
Mistake #4 – Ceasing my contributions during the 2008 recession
This one is a doozy. It’s one of the worst investing mistakes I could have made, aside from the two mentioned at the end. I try not to castigate myself too badly because I was young, and far less informed than I am now. The internet didn’t offer the same kind of information that it does now, and I had few real life examples to emulate. I made the decision that I thought was best at the time. I just happened to be very wrong.
When the stock market crashed in 2008, I saw the value of my portfolio go down. I stopped investing. I’d had an automatic transfer in place. Every two weeks, a certain amount of my paycheque went into my investment account where it would be invested into pre-selected mutual funds.
When the stock market dropped in 2008, I halted my automatic transfers. The mists of time have impacted my memory. I can’t exactly remember how long I stopped investing. Let’s say it was 3-6 months. I could kick myself for making that choice! During those 3-6 months, when the market was low, I should have been buying more units in my mutual funds when they were super-cheap. The stock market was on sale and I chose to wait until the prices went up before I resumed buying into it.
Who goes to the grocery store and says “Wait! This food is too cheap! I need the price to increase significantly before I buy some more”? No one says this, ever!
So when the pandemic delivered a gut-punch to the market in March of 2020, I knew not to make the same mistake. I continued to invest my money. I even scrounged up a few extra dollars and made an additional contribution outside of my regular investing schedule! Today, 4 years later, I’m so very pleased with Yesterday Me for sticking to my plan. Yesterday Me had learned from the past and ignored the Talking Heads of Doom who were out in full force as the coronavirus spread across the planet.
Conclusion
Making mistakes won’t prevent you from reaching your financial goals. I’m proof of that! I made 4 very big mistakes during my investment journey yet I’ve still earned my way into the Double-Comma Club.
Let’s be realistic. There are 2 big impediments that are definitely going to stop you from becoming wealthy. The first one is living above your means, which is to say that your expenses are more than your income. If this is the case, then you’re in debt because you owe money to creditors. If you don’t have money to invest, then you’re hooped.
The other big impediment to becoming wealthy is failing to invest. If you never invest your money in the stock market, then it will never grow for you. Do not let fear stop you from investing. Accept that you will make mistakes. At the same, realize that you will learn from them. We learn a lot more from failure than we do success.
Every baby stumbles after their first few steps. But you know what that baby does? S/he gets back up and tries again. And again and again and again until s/he figures it out. You can do the same thing with your investment portfolio. Make your mistakes. Learn from them sooner. Keep investing and you too will eventually become a member of the Double-Comma Club.
So start today.
[…] had I received the advisor’s advice sooner. For one thing, I wouldn’t have made the rookie mistake of investing solely in dividends for 2 solid decades. I would have learned how to better diversify […]