money mistakes - Millionaire on the Prairie

Getting Good Advice

When it comes to your money, you want to get good advice. The problem is that it’s very hard to know if you’re getting good advice, or whether you’re being scammed.

For my part, I’ve built my portfolio by myself and I started when I was a young adult. All told, it took me more than 25 years before I went to see a fee-only financial planner. He took my information – he crunched my numbers – he told me that I could retire 2 years earlier than I’d planned. His fee was worth every penny!

Bank Advisors

Reader of Long Association know that I’m not terribly fond of banks. I hate paying bank fees. For the most part, I think lines of credit are poisonous. Debt is not something I encourage people to have. If you take away debt & fees, banks have precious little to offer their clients. My impression of bank advisors is similarly dim.

Banks offer mutual funds to their clients. However, the bank’s offerings are generally more costly than what can be purchased elsewhere. Advisors from Bank A will sell you mutual funds with management expense ratios of 1%-2%. They will not tell you about nearly identical products that can be purchased for 0.35% or less, i.e. exchange traded funds (ETFs).

The advisors who work for banks are not bad people, necessarily. They’s simply employees. Part of their job is to sell their employers’ products to the bank’s customers. They are trained and are knowledgeable about financial products. However, the terms of their employment are such that they will never advise customers to check out the competition’s investment products. Advisors working for banks will never encourage customers – you – to go and see if the same product can be obtained for a lower price. This is just a simply fact. Advisors at Bank A receive their paycheques from Bank A, not from you. Since you’re not paying them, the advisors’ interests are more aligned with their employer’s than with yours.

I went to a Bank near the start of my investment journey. It was a less than great experience.

Was I getting good advice? No.

Did the bank charge me a high management expense ratio? Yes.

As I learned better, I did better. Time to move on.

Investment Companies

After my experience with buying mutual funds from the Bank in my early twenties, I decided to invest with one particular investment company. They had a slick marketing folder, an office in the mall near my job downtown, and I liked their website. What other criteria could I have possibly needed to choose an investment company?

I have no idea if that company is still around. What I do remember is that they charged atleast 1% for their mutual funds. The management expense ratios (MERs) were the same as, or a touch lower than, the Bank’s.

Was I getting good advice? No… but atleast more of my money was directed into my investments and not being paid out in MERs.

As time passed, I moved my money to a different investment company that had far lower MERs for their products. While this second company did not have an office in the mall, they did have a much better website and a wider array of products. (Throughout my whole investment journey, I never stopped reading about money and investing. As I learned more, I made better choices. Like they say – when you know better, you do better.)

I improved my portfolio mix by moving to the second investment company and I saved money on the MERs I was paying. Further, the second company was easily able to set up an automatic transfer from my chequing account to my investment account. Each time my paycheque landed in my bank account, the investment company would scoop out a portion of it to be added to my investment portfolio. This was a free service! Once I’d set it up, I never had to think about it again. I could go about my daily life knowing that my money was being investing for the Care and Feeding of Future Blue Lobster. All was well… for a time.

Bear in mind that I never stopped learning. I continued to read more books from the library and I delved into online articles about money & investing. That’s how I came to learn about ETFs and index funds, investment products that mirrored mutual funds for a much lower price. In other words, I could re-create the same portfolio by replacing expensive mutual funds with cheaper ETFs and pay even lower MERs. Eventually, I had to accept the fact that my second investment company’s MERs were too high when I could get the nearly-identical portfolio elsewhere for less money. Though I really enjoyed the convenience of my second investment company, that convenience wasn’t worth paying higher MERs. Whatever wasn’t diverted to paying MERs would instead be invested for long-term growth. I realized that I could improve my returns by investing my money into ETFs so that’s why I did.

Self-Directed Learning and Investing

At some point in my investment journey, I had opened a self-directed brokerage. When it was time, I moved my portfolio from my second investment company to my brokerage account. In a few simple keystrokes, I sold the mutual fund products and bought ETFs from BlackRock (aka: iShares). Unlike my last investment company, this one did not make withdrawals from my bank account. I had to set up my own automatic transfer so that I could buy units every month. And since I was using my brokerage account, I had to pay a commission.

Big deal! The money I was saving on my MERs was more than sufficient to cover the monthly commission fee. My twin goals were being met: consistently investing every month and saving money on my MERs.

What could be better?

Vanguard Canada was better. By the time Vanguard came to Canada, my self-directed investment education had already led me to its US counterpart. I was ready for their Canadian arrival. Now, I didn’t sell anything from my BlackRock holdings. For the most part, I’m a buy-and-hold investor. The exceptions I can remember were moving from the Bank to the investment company, between my investment companies, and then from my last investment company to my brokerage account.

Instead of selling investments, I simply re-directed future investment dollars to Vanguard’s products instead of BlackRock’s. Again, Vanguard’s offerings were nearly identical to BlackRock’s and Vanguard’s cost less. There was no good reason to pay more money for the same damn thing.

My Fee-Only Advisor

Despite the pride I felt in building my investment portfolio, I wanted an objective review of what I had done. My goal was to retire early on a certain income. Despite my years of self-tutelage, I’d never discovered the formula that could give me a straight answer. Could I retire when I wanted? Or was I looking at another 15 years of work?

So after 25+ years of investing on my own, I went to a fee-only financial planner to get the answers to my questions…. The news was good. It was better good – it was great! He told me that I was on track and that I could retire two years earlier than I’d planned. Woohoo!

For the first time in my investing life, I was getting good advice. The financial planner pointed out a few weaknesses in my investment strategy. He offered me a tentative, new plan and explained how it could improve my returns going forward. However, he also assured me that I had done a very good job by myself and that my goals would be met whether I followed his suggestions or not.

When it comes to getting good advice, I’m a fan of fee-only financial planners. They work for the customer, who is you. They make recommendations, but they don’t sell investment products. That means that they don’t get a commission from someone else for making certain recommendations or pushing the investment-product-of-the-month. You’ll pay a fee for them to analyze your current situation and to create a plan whereby you will meet your financial goals. They will give you advice and it’s up to you whether to follow it.

Have I made mistakes? Yes – many mistakes. I didn’t get great advice to start. The only rule that I’ve always followed was to live below my means. (Even when I was stupid in 2008/2009 and stopped investing when the market crashed, I just piled up money in my savings account until it was “safe” to start investing again.) I saved and invested and switched my investments and kept learning-learning-learning … then more than 25 years later, I finally went to a professional advisor.

Getting good advice is worth the effort. It allows you to reach your goals faster and more efficiently. Though I am self-taught, I have benefitted from many resources over the years. I’m confident that I have the knowledge to separate the good advice from the bad as I continue to fulfill my financial goals. You can do it too. Start today. Save – invest – learn – repeat. When you know better, you’ll do better. I promise.

Power thru the volatility & stick to your knitting

There’s no doubt about it. We’re in a period of volatility in the stock market. For the first time, in a long time, there’s been a run of “down” days. The stock market has been in the red and the market has closed lower than the day before. I do not claim to be any kind of expert on such things, but even I can see that the value of my portfolio is dropping too. This is entirely due to the fact that I’m invested in the stock market.

So what’s my next move? What steps should I take to make my portfolio go up?

Short answer: it’s time for me to stick to my knitting!

I can’t do anything to move the stock market the way I want it to go, which is up. The factors I control are how much I contribute, how often, and into which investment. Everything else is out of my hands. Over the long term, the stock market goes up. This has been proven repeatedly in the past. I have no reason to think it won’t go up again in the future. So I’m going to power thru the volatility.

And you should power thru the volatility too.

I view what we’re experiencing now as a correction. It’s happened before, and it will happen again. Corrections are completely normal! Do the Talking Heads of economic media generate a lot of jibber-jabber about them? Yes, they do…. because that’s their job. The jibber-jabber results in viewers, which translate into ratings, which translate into money.

Pay them no mind. Stick to you knitting.

When the 2009 correction rolled around, I made one of my biggest ever investing mistakes. I stopped making regular contributions into the market. In other words, I halted my dollar-cost averaging system of investing. I froze like a deer in the headlights because I focused on the jibber-jabber. I stopped my contributions for 3 months. Yikes! Huge mistake! Doing so meant that I wasn’t investing at the bottom, when the market was at its cheapest. I waited until the recovery and then I re-started my investment system. This was one of the stupidest moves I have ever made, and I promised myself that I would never make that particular mistake again!

Learn from mistakes wherever you find them.

You need not make this mistake yourself. Don’t stop contributing to your investments just because we’re in a period of volatility. Trust in your plan. You’re investing for the long-term, remember?

There have been subsequent corrections, and I’m happy to say that I’ve kept my promise. No matter what, my automatic transfer funnels money from my chequing account to my investment account and I buy units in my ETFs on the appointed day. My investment strategy has remained consistent ever since 2009.

These past two weeks haven’t been fun. No one likes to see the value of their portfolio decrease, including me. I’ve decided to stop checking the value of my portfolio for a little while. Before this correction started, I would check the value each day and smile to myself. Lately, my smile’s been turned upside-down. I’ve chosen not to torment myself. My transfer will remain in place, and I will continue to invest in my selected ETFs. However, I’ll check my portfolio’s value less frequently.

This is the lesson I learned from the 2009 correction. The stock market will never go to 0. It will go up and down, but it will never go all the way down to 0. I’m investing for the long haul. Even after retirement, there’s a good chance I’ll be around for another 20-30 years. This means I still have decades of investment ahead of me. (Whether I’ll be investing as much during retirement as I do now remains to be determined.) There is no point in worrying about the day-to-day gyrations of the stock market when I’m still invested for the long-term.

Allow me to very clear on this next point – I am not an expert. My wisdom, such as it is, comes from years of personal experience. I cannot predict the future, and I don’t know your particular circumstances. I am not qualified by anyone to give you expert advice. What I say is based on what has worked for me & for those in my circle who discuss such things. I fully admit that my experience is not going to be the same as yours.

That said, I want you improve your odds of ensuring that Future You is financially secure. Continue to invest in the stock market. Take a long-term view. Keep atleast 60% of your portfolios in equities. Invest on a regular basis. Stick to your knitting and ignore the jibber-jabber. Save – invest – learn – repeat. Power thru the volatility and enjoy the rewards on the other side of this correction.

My Money Mistake – Investing vs. Paying Off a Mortgage

One of the eternal questions that’s raised in the personal finance world is whether one should be investing or paying of a mortgage. I made my choice 15 years ago. In hindsight, my choice could qualify as a mistake but, if so, it’s not the worst one I’ve ever made. As I’ve said before, personal finance is personal and it should be about what makes you the most comfortable when it comes to investing your hard-earned money.

I was raised to not carry debt. It’s a good lesson, and I can’t disagree with it too, too much. That said, there are nuances to debt that I did not learn nor understand until after I’d paid off my mortgage at age 34. I’m going to share my perspective of those nuances with you so that you have the information to make the best decision for your own life and goals.

Different Choices, Different Risks

Jordan and Leslie are both 30 years old when they finally buy their first house. They both have 25-year amortizations, and they both have an extra $1500 per month that can be used for investing or paying down the mortgage.

Jordan decides to pay off his home early. His extra $18,000 per year goes into making extra mortgage payments. He’s in line to pay off his home in 15 years when tragedy strikes. At year 14 of the amortization, Jordan loses his source of income and cannot make his mortgage payments. Within six months, he loses his house to the bank in foreclosure. After years of making mortgage payments, Jordan is left without a house and without an investment portfolio. He has to start over from scratch – find another job, build another down payment, start making mortgage payments all over again, figure out how he’s going to pay for his retirement.

Leslie makes a different choice because she knows that time lost can never be regained. Investments need to be made early so that they have the maximize time to grown. Leslie decides to pay minimum monthly requirement on her mortgage, which commits her to the full 25 year amortization. Leslie invests her extra $1500 per month by fully funding her TFSA and RRSP every single year. Once those two registered plans are maximized, she invests the remaining money in a non-registered investment plan through a brokerage. In short, Leslie chooses to invest $18,000 per year. As with Jordan, Leslie loses her employment income at year 14 of her mortgage.

Leslie’s not worried about losing her house. Why not? Her investments have grown quite nicely over 14 years. She has money in the bank. Her dividends and capital gains are enough to provide her with cash flow to pay the mortgage. They’re not yet enough to replace her entire former income, but they’re enough to keep her afloat until such time as she finds another job.

Even if Jordan and Leslie hadn’t lost their jobs, Leslie would still have been wealthier than Jordan at the 25-year mark. Why?

Leslie’s investments would have had 25 years to grow while Jordan would have only had 10 years of growth. Even if he starts investing his entire former mortgage payments the day after his mortgage is paid off, Jordan’s investments will not grow as large as Leslie’s. Her investments have had an extra 15 years to grow, assuming the same rate of return for both portfolios. Both Jordan and Leslie would have a paid-off homes at the 25 years mark, but Leslie would also have a much bigger cash cushion than Jordan.

Hindsight is 20/20.

Now, don’t get me wrong. The logic of this example was lost on me when I took out a mortgage on my home. As a matter of fact, I don’t even think I saw the options presented this way until after I’d paid off my home. If I’d seen it sooner, I would have atleast thought about it while paying off my biggest debt.

With the benefit of hindsight, I now realize that I should have followed Leslie’s lead. It’s been nearly 25 years since I took out my first mortgage. Had I kept that mortgage and invested my money instead, I’d be that much closer to financial independence. Instead, I chose to become debt-free in my early 30s and have been diligently investing in the stock market for the past 15+ years.

My parents taught me to stay out of debt, and I heeded their advice. Was I wrong to do so? Not really… Yet, if I had learned about more about investing and the compounding of time, I would have made a better-informed decision. I might have better appreciated what it meant to lose those early years of compound growth as I worked very hard to pay off my home in 5 years.

Since you’re best-placed to know your own life goals & dreams, you will make your own choice. Investing vs. paying off a mortgage is a major financial decision. The consequences of the choice won’t be known until long after you make it.

My hope is that you make an informed decision. While you can’t know the future, you can influence it by making wise choices and planning accordingly.

There’s nothing wrong with changing course, if necessary.

If you’re currently making extra payments but you’re doubting that choice, then know this. It is perfectly okay to change your mind. When you know better, you do better. Maybe you stop the extra payments for a few months while you stuff your RRSP and your TFSA. Perhaps you decide to alternate – one month the extra money goes to your mortgage and the next month it goes to your investments. You have to do what makes you most comfortable. And if you decide to keep paying off your mortgage, then do so with the full knowledge of what that might mean for your future.

We no longer live in a world where the majority of people have pensions. For the majority, saving for retirement is up to each individual person. Lifetime employment with the same employer is no longer the standard. Committing to decades of mortgage payments without the security of gainful employment is risky. In Canada, houses are ridiculously expensive so mortgages are often several hundred thousand dollars. I understand why getting rid of such a large debt is a huge priority for people. At the same time, getting out of debt shouldn’t diminish the responsibility you have to funding the Care & Feeding of Senior You Account.

When I think about my own choice through the lens of maximizing my wealth, I feel that I made a mistake and that I should have kept my mortgage for as long as possible in order to invest. Yet when I consider the fact that employment is not guaranteed and funding retirement is on the shoulders of the employees, I think I was wise to eliminate my mortgage as fast as possible.

Will I have the absolute maximum amount for my retirement? No, but I’ll still have enough and that’s what matters most.

Beware the HELOC!!!

HELOC is an acronym that stands for home equity line of credit. It is a way for homeowners to access the equity in their homes without actually selling the home. Banks love these kinds of loans because they are secured by the property. For this reason, HELOCs are risky – they put your shelter at risk. This is hardly ever a wise move from the personal finance perspective!

In short, if a homeowner doesn’t repay the HELOC, the bank has the right to foreclose on the home in order to recoup its money.

Another way to think of a HELOC is to view it as a line of credit that is tied to your house. An unsecured line of credit carries a higher borrowing rate, since the bank doesn’t have any recourse if you don’t make your LOC payments as required. Banks presume that most people do not want to lose their house and that they’ll do whatever they have to in order to avoid that unfortunate outcome. As a result, the risk of delinquency is also presumed to be lower than lending borrowers money through an unsecured line of credit. Since the HELOC has a lower risk, the bank charges a lower rate of interest.

Those who’ve been reading my blog for a while now already know that I hate debt. Payments to creditors prevent most people from investing for their futures. Debt forces people to put today’s income towards paying for past purchases.

I especially despise the HELOC. Like all loan products, banks benefit from them more than the consumer. If you have a HELOC, you have to make payments on the loan each month. And if you miss enough payments, then you’re considered delinquent on your debt and the bank can take your house away from you. This is why I personally believe that HELOCs are risky.

Remember! A HELOC is a charge registered against your mortgage. When you take out a HELOC, you’re putting your home up as collateral.

If you really must take out a line of credit, then I would urge you to get an unsecured line of credit. This kind of LOC is not tied to your house. If you fail to pay it, you certainly damage your credit rating… but no one is going to take away your home. It might take 7 years to repair your credit, but so what? It’s better that you repair it from the comfort of your own abode, than suffer the double-whammy of repairing your credit and also losing your home through foreclosure.

Another reason I very much dislike the HELOC is that it is a loan that can be called at any time. A HELOC is a demand loan. That means your bank can demand that you repay it whenever they want.

Let’s say you take out $45,000 of debt via a HELOC against your $375,000 house to do… whatever. (Equity withdrawn via a HELOC can be spent however the homeowner sees fit.) You agree to repay the HELCO at a rate of $750 per month. You’re making your payment as agreed, and getting on with the business of living your life. For reasons they need not declare, your bank gets twitchy and demands that you pay off your outstanding HELOC balance. And if you don’t, they’ll proceed with foreclosure proceedings to get their money bank. You’re suddenly in the position of losing your $375,000 house over a $45,000 debt…Not good!

How are you going to repay the debt? If you’d had the money in the first place, you wouldn’t have borrowed from the bank, right?

I’d suggest that you think long and hard before you take out a HELOC against your home. Make sure you understand what you’re risking before you sign on the dotted line. And if you already have a HELOC, then I suggest that you pay it off as soon as you can.

Life is stressful enough. The risk of your home possibly being the subject of a foreclosure is one added stress that you should work very hard to avoid.

Go Beyond the Letter “A”

With age comes wisdom…or so they say. Speaking from personal experience, I can say that my wisdom is arriving in dribs and drabs. For their part, the birthdays arrive at a seemingly more frequent pace. I’ve made plenty of money mistakes, but I’ve finally learned to go beyond the letter “A”.

Blue Lobster, what the hell are you talking about?

It’s simple. I’ve finally learned to take my own advice about continuing to learn about personal finance. When I was younger, I would read a book and believe that the author’s words were the definitive way to do one particular thing. It never occurred to me that the author wasn’t a subject matter expert. After all, she or he had written a book! Who was I to doubt their greater experience? Or to even suggest that their advice/steps/insight might not be applicable to my individual circumstances?

Thankfully, the good folks behind the X-Men franchise created a villian who uttered words of wisdom that I’ve since learned to implement in my own life: “Take what we need, gentlemen.”

And later on, I came across a variation of the above: “Take what you need. Leave the rest.”

Looking back, I would’ve made fewer money mistakes if I had come across this wisdom sooner. For example, one of my biggest money mistakes was to focus on eliminating debt while ignoring the need to invest in the stock market at the earliest opportunity. I read The Total Money Makeover many years ago. I followed this book’s instructions diligently and focused extremely hard on getting myself out of debt.

What I regret is that I didn’t consider the possibility of investing my money sooner while paying off my debt slightly less agressively. My money mistake was in pursuing one path without giving adequate consideration to the other options open to me. I read this one book and I assumed that it was the optimal path for my life & my money. Then, I followed its steps without question.

In other words, I did not go beyond the letter “A”… I made the mistake of believing that the starting point represented by the letter “A” was the whole alphabet and that I didn’t need to learn anything more than what was in the pages of this single book. I was young and inexperienced, but also so very, very wrong.

Looking back now, I see that taking advice without considering my own individual goals and priorities is never the smart thing to do. There is more than one way to achieve the ultimate objective. Had I taken the time to consider the option of investing sooner while taking slightly longer to pay off my debt, then I would be in a position to retire now. One of my long-term goals has always been to retire as soon as possible instead of waiting until my 60s. By following the path set in the TTMM book, instead of considering all of my alternatives before choosing a course of action, I’ve delayed my retirement date by atleast 5 years. Ouch!

As I’ve written before, I wholeheartedly accept some of the Baby Steps as set out in TTMM, but I do not accept all of them as the one true path to financial prosperity. For those who are financially fortunate enough to do both, I would suggest investing in stock market while also paying off non-mortgage debt. The debt will eventually be gone, and you’ll be left with an investment portfolio that’s chugging along. At that point, you have the choice of investing your former debt payments in order to meet your financial goals faster. Or you can continue with the same contribution level you’d established while paying off debt and use your former debt payments in other areas of your life. In both options, you have an investment portfolio working hard for your 24/7 while you go about the business of living the life you want to live.

That said, I don’t want you to make the same mistake I did. Keep in mind that I’m not a financial expert nor am I licensed to give financial advice. Rather, I’m just an anonymous voice on the internet that enjoys talking about personal finance and sharing what I know. Consider my words and evaluate the source, then determine whether either proposed course of action gets you closer to fulfilling your life’s dreams and ambitions.

I’ve been working hard to practice taking-what-I-need-while-leaving-the-rest in my life. This new-to-me perspective requires me to broaden my horizons by considering things that I would’ve automatically disregarded. Metaphorically speaking, it’s necessary for me to go beyond the letter “A”. The first piece of knowledge is akin to the first letter of the alphabet. This is not the point at which I should simply stop learning. I need to move to letter “B” if I’m going to maximize my chances of learning how to get what I want.

For me, moving from one lesson to the next involves routinely assessing my habits. Some I’ve kept. Others I’ve discarded. I still read about personal finance every chance I get. I’ve purposefully found people who share my love of this topic. I seek out those who give me insightful feedback on my plans & ideas. No longer do I blindly accept everything that’s posited by someone else. By forcing myself to learn as much as I can, I’ve developed a nuanced approach to new ideas about how to achieve my goals. At the end of the day, I’m much better at assessing when to stick to my chosen path and when to tweak it ever so slightly. No longer do I give the opinions of others more weight than they are properly due.

Today, I ensure that I always go beyond the letter “A”. My dreams and priorities are too important to leave to chance. It’s up to me to do my very best to make them come true. Only time will tell if I’ve minimized my money mistakes. Even after decades of reading and learning about personal finance, my education is still not complete. My knowledge is hard-won, yet there’s still more to learn, more to consider.

You owe it to yourself to pursue your own life’s goals too. You are worthy of having the life you dream of, so make sure that you always go beyond the letter “A”.

Mistakes with Money – Hindsight is 20/20

As I’ve said before, you need not make every mistake yourself. You can learn from the mistakes of others and make better choices for yourself. Luckily for you, my hindsight is 20/20. If you’re facing the choice between paying off your debt or investing your money for growth, perhaps my experience can offer you some insight into the best choice of your circumstances.

Roughly 14.5 years ago, I had a choice between paying off my primary mortgage or investing a six-figure lump sum of money into the stock market. At the time, I owned two rental properties and my tenants both told me they would be moving. Faced with the prospect of having empty rental units, I immediately chose to sell. It literally never occurred to me that I could get new tenants. I was a young landlord who hadn’t heard of people like Brandon Turner of Bigger Pockets or Coach Carson. No one in my family owned rental properties so I didn’t know where to find the mentorship or guidance that would have opened my eyes to my many options.

Unfortunately, I reacted poorly and made a decision out of fear. Instead of doing a basic Google search on what to do when tenants move out, I sold off my rentals within weeks of each other. The housing market in my corner of the world was on fire!!! I’m sure it was the easiest money my realtor had ever made.

I took the proceeds from my rental properties and paid off my primary residence. Within a few weeks, I was completely debt-free! Woohoo!

What would’ve happened if I’d invested that money and kept my mortgage?

Firstly, I would not have had to pay a penalty. The mists of time have obscured the exact numbers, but I do seem to recall paying a penalty for breaking the mortgage on my primary home. Where I live, you can break a mortgage without penalty if you’re selling your home. However, if you’re simply paying off the mortgage, then the bank wants you to pay the interest that would’ve been paid as per the mortgage contract.

I was younger, financially un-sophisticated, and completely committed to being debt-free. So what did I do? I paid a 5-figure penalty to break my mortgage. That was definitely a money mistake! I had the cash from my two rental properties. I could’ve simply carved out a chunk of it to cover the remaining years’ payments under my mortgage agreement, and thereby avoided the penalty, while investing the rest. When the mortgage was up for renewal in a few years after the sale of my rentals, I could have just paid off the mortgage debt in full. Alternatively, I could have invested the whole lump sum and simply kept up with my regular mortgage payments until the mortgage was discharged.

By paying off the mortgage on my primary home, I didn’t invest as much as I could have in the stock market as soon as I possibly could. If I’d invested those proceeds in the market, then I’d be a hell of a lot closer to my original goal of retiring at 50.

We know that, up until the onset of the pandemic, the stock market has rewarded investors with a very long bull-run. Full equity portfolios have done amazingly well between 2009 and 2020. Brace yourself! My rental proceeds were over $100,000. Had I been as wise then as I am now, I would’ve invested that lump-sum of cash and continued with my life-long habit of investing a chunk of my paycheque every time I got paid. My investment portfolio would’ve definitely landed me in the Double-Comma Club by now…. and my mortgage would still have been paid off in good order.

Instead, I focused on becoming debt-free. I chose to pay off my debt instead of investing for my future. My actions were not aligned with my goals.

Why weren’t they aligned?

That’s a good question. Thinking back, my own ignorance about investing is the root cause of the mis-alignment. I didn’t know as much then as I do now. Also, I’d been watching the global monetary chaos created by the financial crisis in 2007-2008 and I wanted no part of it. Being debt-free felt safe. I didn’t have the luxury of relying on someone else’s paycheque to support my household. I very much craved the security of owing not a single nickel to anyone! In other words, I let my ignorance and my fear of being in debt guide my actions.

That global financial crisis caused the stock market to drop. Today, I know that such declines are to be relished because they are excellent buying opportunities. Steep drops mean that the stock market has gone on sale, and that it’s time to load up on quality investments in good companies. Back then, I naively determined that the “smart” course of action was to wait until things settled down before investing any money in the market. As I’ve written before, I waited far too long to start investing. Sigh… this is why hindsight is 20/20. Coulda-woulda-shoulda! I delayed the implementation of my investment strategy for years. It was the wrong move!

Now that I’m older, and wiser, I realize that I should have invested my lump sum. The market started its recovery in 2009. Sure, I would have invested in 2006 and then I would have gone through the rough years until the recovery started. It wouldn’t have been terribly fun, but it would have been quite profitable. Like I said earlier, that course of action would have gotten me much closer to my financial goals.

Don’t feel too, too sorry for me. Like I said, I used that lump sum to pay off my house. I haven’t had a mortgage on my principle residence in over 14 years! Trust me when I say it’s a good feeling. Not having a mortgage means a smaller overhead for my life. My emergency fund need not include 6-9 months of mortgage payments. I don’t have to worry that the bank is going to take away my home. Instead of forking over mortgage payments, I can make contributions to my investment portfolio. I sleep better knowing that my largest debt is in my rearview mirror.

Like they say – if I knew then what I know now, I would’ve made different choices. Hindsight is 20/20…c’est la vie!

The Secret Sauce Isn’t Being Bright

Being bright isn’t a requirement to being successful with personal finance and investing. I speak from personal experience as I don’t consider myself to be overly bright. There are many people in my circle who are much smarter than me and who learn things much faster than I do. Their net worths are not necessarily larger than mine. It’s taken me a long time to accept the fact that being bright has very little to do with whether someone will succeed in the realm of money.

Those who’ve read this blog for a little while know that I’ve erred during my investment journey. I’m the first to admit that I’m not the smartest investor in the room. I’ve made so many mistakes!

When I first started investing years ago, I put my money into mutual funds instead of index funds and exchange-traded funds.
Investing in mutual funds instead of index funds & ETFs means I paid higher management expense ratios than I needed to pay.
I invested in dividend-based ETFs instead of buying equity-based ETFs.
I didn’t earn as much as I could have during the 10-year stock market bull run that ended in February of 2020. (D’oh! How I would love to be able to unwind that mistake.)
And I don’t increase the rent on my rental property every year. I’m sure there are some in the real estate investment community who see this as a very grave mistake.

Despite these mistakes (and I’ve made way more than 5), I’ve learned that you don’t have to be all that bright to do well in personal finance. You do need to have disposable income, since you can’t invest what you don’t have. I’ve crafted a list of traits that I believe are essential to successfully building wealth.

Being smart is not one of the traits!

You have to start from where you are. No investor has ever made money without starting to invest. Thinking about investing is great but people don’t earn 7% returns on investments they only dream about. They only earn returns on money that’s actually invested in real life, whether that’s in the stock market, in real estate, or in a business. Investing your first dollar isn’t a function of being bright. It’s a function of taking action.

Consistency isn’t dependent on how bright you are either. I’m a huge fan of automated transfers. Every time I get paid, some of my net income is siphoned away from my chequing account. That money is invested to pay for my future goals: retirement, travel, house renovations, whatever. If the money is for a planned purchase that’s not part of my day-to-day basic life, such as groceries, gasoline, and utilities, then the money is automatically whisked into various accounts and it stays in place until it’s time to make those future purchases. Automated transfers have ensured that I’ve always had money going towards my investments.

No one needs to be all that bright to be disciplined. You’ll need to be disciplined if you’re going to stick to your priorities. You’re the only expert when it comes to how best to spend your money because only you know what’s most important to you when it comes time to spend it. It also means that you’re the only one who’s responsible to say “No” to the things that don’t move you towards your dreams. Believe me when I say that there is alway someone who wants your money. Being bright is not a pre-condition of only spending your money in ways that align with your priorities.

Finally, never stop learning. Like I said earlier, I’m not particularly bright. And it takes a long time for me to learn new things and for concepts to sink it. THAT’S OKAY!!!! Learning at my own pace isn’t an obstacle to achieving my goals. If anything, it’s a benefit. Once I’ve been exposed to a new concept, I can learn it as thoroughly as I want to. And once I’ve done that, I can determine whether it will help me meet my financial priorities.

No one is grading your progress.

I’m not in school anymore. There’s no teacher under a time pressure to get through a pre-set curriculum. I’m my own teacher now. Taking as much time as I need to teach myself a particular concept is a good thing in real life. Unlike a school setting, there isn’t a fixed number of hours to be spent teaching one concept before the teacher moves on to the next one. I’ve been investing for over 25 years, and I still don’t understand how Price-to-Earnings ratios work. Is it better if they’re high or low? What exactly do they mean? Do they fluctuate every day? What are the factors that impact them?

Hear me now: I’ve been investing in the stock market for 25+ years, and I did not let my ignorance about P/E ratios stop me from building a solid portfolio that kicks off a nice amount of dividends each year. Admittedly, I’m not a stock-picker. In other words, I don’t buy individual stocks after analyzing their annual reports and doing research into both the company and the industry. If I were an investor who had gone the stock picking route, then I would have learned a lot more about P/E ratios and other nuanced stuff. The information is out there and I would have spent my time learning about it.

When it comes to being good with your money, habits will always beat brains in the long run. Being smart isn’t what helped me the most. Having the investing habit and putting automatic transfers in place has been my secret sauce. Together, these tools have been tremendously more beneficial for my portfolio and for meeting my short-term goals. Once I had prioritized how to spend my money, relying on habits and tools propelled me towards attaining my goals.

Being bright is not an indicator of whether you will be successful in handling your money. Again, speaking from personal experience, you can make stupid money mistakes and still set yourself up for future financial success.

The Holidays.

As hard as it may be to believe, the holidays are only a few weeks away. Thanksgiving will be here in another couple of weeks. (Or in November if you’re in the USA.) Then it’s another few short weeks until we celebrate Christmas, or Hannukkah, or Kwaanza, or Festivus.

While the holidays will be different this year, the fact remains that people will do what they can to keep tradition alive. That might mean mailing more presents, or swapping recipes instead of baking in the same kitchen. It might mean less travel but more time doing video chat. Or it might mean more road trips and fewer flights.

No matter how you and your loved ones plan to celebrate the holidays COVID-style, there’s a good chance that your wallet is going to take a gut punch before the celebrations are over. The time to start saving for the holidays is now. There are roughly 13 weeks left in 2020. Start setting some money aside each week so that you can pay for the upcoming expenses without putting them on credit.

Homemade for the holidays?

I’m going to take a wild guess and say that you’re one of the many people who are staying closer to home. If that’s so, then maybe you have some extra time on your hands. This might be the year that you take up baking Christmas cookies or other holiday treats. If you start a few weeks before the big day, you can probably bake some presents for the people you’ll be seeing.

After the year we’ve had, and the social distancing we’ve done, I suspect that a great many of us don’t want more stuff. However, we’d appreciate sharing a bite of something delicious with those we’ve missed. Stuff is easily forgotten. Happy time spent together? Not so much. People want the connection… and most of us connect over food in one way or another.

If you’re doing to be online anyway, try watching some videos of people baking (or cooking) something you’d like to share with your loved ones. I recently discovered the Preppy Kitchen on YouTube. I’ve spent hours watching the host bake delicious desserts. My eyeballs have consumed more calories than I could ever possibly burn off in one lifetime! That said, I’m still considering which of his delicious recipes I will be baking for Christmas dessert.

It doesn’t have to be a baked gift. You could make or create so many other things to be shared. Here’s one list of ideas that might appeal to you. The internet is a vast place so keep looking if none of these suggestions are the ones for you.

Spend cash, not credit!

Maybe you’re not the creative or crafty type. No worries! I’m not either. I bake year-round, but only make Christmas cookies at the end of the year. I’m more of a mall-shopper when it comes to presents for the holidays.

That said, please follow my lead. Only spend cash on the presents for others. No one wishes for their loved ones to go into debt to get them stuff. Well, maybe kids do but that’s because they don’t understand credit and debt just yet. The adults who love you don’t want you to be financially harmed over doodads and knickknacks. If you must buy people presents, then stay out of debt to do so.

Figure out a budget of how much you want to spend on others, then stick to it. Thanks to the pandemic, there’s a chance that your discretionary spending on other stuff has been curtailed this year. There’s a chance that the money not spent on commuting, the gym, sports activities, and eating in restaurants has resulted in a little bit more jingle in your pocket. I’m not encouraging you to spend more than you otherwise would! Savings should not be squandered simply for the sake of doing so.

What I am saying is that, hopefully, it’s easier for you to keep the credit cards tucked away this holiday season. If you’re fortunate, then you can spend cash only to fulfill your desire to give.

We are two thirds of the way finished with 2020. The holidays are coming up quickly. It would behoove you to start planning for how you’re going to pay for them. I want you striding into 2021 with a smile on your face and without debt on your mind!

Weekly Tip

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Make extra payments over the life of your mortgage to minimize the interest you pay over the life of your mortgage loan. This can be done by increasing your minimum payment each year. Or it can be done by putting a lump-sum down against your mortgage. The more extra payments you make, the less interest you will pay to the bank.

MER – Cheaper is Better

The management expense ratio (MER) is the percentage of your portfolio that you pay to the company that sells you the index fund, exchange traded fund (ETF) or mutual fund that you hold in your portfolio. The fees for these products must be disclosed to potential buyers. Thanks to the wonder that is the internet, you can easily do an online search of any mutual fund, index fund or ETF and find its MER.

Generally speaking, mutual funds are more expensive than both index funds and ETFs. I’m not entirely sure why other than to say that mutual funds are actively managed. This means that there are a whole lot of people who are researching and analyzing data before doing a whole bunch of buying and selling of various stocks for inclusion in the mutual fund. All of those people need to be paid. There’s a lot of overhead that must be covered by fees from clients in order to ensure that all of that activity is performed.

In sharp contrast, index funds and ETFs are passive investments. They simply buy into the top companies that meet their investment objective and then it’s done.

You’ll have to do your own research before you in invest. You can also speak to a fee-only certified financial planner. However, my general advice to most people is the following. If you have the choice of buying a mutual fund or an index fund/ETF, go for the lower cost product so long as you can still achieve your investment goals. It will be cheaper for you in the long run and you’ll wind up with more money in your kitty.

Take a look at the following MER calculator. It allows you to do a side-by-side comparison of the impact of paying a higher MER on your portfolio. You can control so many variables: your investment horizon, the MER, your starting balance, the assumed rate of return, and your contribution amount.

See for yourself…

Start with an investment of $1000 in both Fund A and Fund B. Assume that they are both identical and both of them will help you achieve your long-term financial goals. Commit to contributing $50 per week into your portfolio, which is $2600 per year.

Enter an annual average return of 7% for both funds. And assume that you’re going to be investing this money for 30 years. The average life expectancy is roughly 80 years for humans. Believe me when I tell you that 30 years is not an unreasonably long investment horizon.

Here’s where the steak starts to sizzle. Fund A is a mutual fund charging a measly 1.5% per year. In other words, Fund A skims off 1.5% of the value of whatever’s in your portfolio. Fund B is an index fund, or an ETF, which is charging a minuscule 0.05%. Go ahead – plug those numbers into the formula.

Now, hit the calculate button. What do you see?

Fund A – with the higher MER – is going to cost you $37,330.78 in fees. On the other hand, Fund B – with the much lower MER – is going to cost you $1,244.36.

That’s a difference of $36,086.42 in fees. This is money that is not staying in your investment portfolio since it’s being paid to someone else. Why would you want to pay this amount if you didn’t have to?

Play with this calculator – change the variables – see the impact of higher MERs over a longer period of time. I think you’ll agree with me that when it comes to paying for investment products, the MER matters – cheaper is better.

Hold up, hold up, hold up!

Blue Lobster, are there really investment products that pay 0.05% in MER?

Yes, Gentle Reader, there are. At the time of this post, the website for VanguardCanada is showing two equity products – VCN and VCE – with MERs of 0.05%.

*** To be clear, I am not being paid by Vanguard Canada for mentioning these investment products. I do own units in VCN.

All else being equal, cheaper is better. For simple comparison, the Big Six banks in Canada sell mutual funds that are equivalent to VCN and VCE. At the time of this post, the MERs on their products are much higher than 0.05%.

I have to amend my earlier statement. At the time of this post, the links for CIBC and HSBC do not disclose the MERs for their equity products. To find the MERs for their products, you will have to do a bit more hunting-and-clicking but you’ll get there. The other 4 banks disclose this information on their website with one-click. This tells me that atleast 4 of the 6 big banks are willing to ensure that their customers can easily find the right information to make an informed choice.

Now you know better.

Paying a higher MER means less money in your pocket at the end of the day.

As a general rule, cheaper is better when it comes to assessing the MER of equivalent investment products. I want to be clear that you shouldn’t base your entire investment decision on the MER. It is a significant factor, but it’s not the only one.

You still have to determine your investment horizon. Is this money for a short-term goal or a long-term goal? If long-term, MER should be given more weight in your decision-making.

Are you comparing equivalent products? An index fund that invests in short-term bonds should not be compared to a mutual fund that specializes in gold and diamonds. The risk profiles of the two products are vastly different. It is reasonable that they would have different MERs so this factor should be given less weight at decision-time.

It is a serious money mistake to pay a higher MER. If you want to really blow your mind, go back and change your starting balance to $10,000 and your annual contribution to $5,200. The disparity in MER cost grows to $83,130.29! And if you extend your investment horizon out to 50 years, then you’re saving yourself $442,979.28! Wouldn’t you rather have that extra money in your portfolio in 30 years? I know I would!

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Weekly Tip: Track all your expenses so you know where you spend every dollar. Despite my constant admonitions to save-and-invest, I know that most people enjoy spending money. However, I want you to be 100% confident that you’re spending your money on things that make your life better. Tracking your expenses is one way to do this. If you see that you’re spending money on things that don’t bring your joy or that make your life worse, stop buying those things. Easy peasy – lemon squeezy!

Mistakes with Money

Not a single one among us is born knowing how to use money perfectly. Our skill with money comes from making mistakes and learning from them.

For my part, I’ve made several notable mistakes with money over the years. I’ve written before about how I failed to take action with my investment plan for 5 full years. That one still hurts when I think about it. It took me 5 years before I finally rectified that situation by committing a good chunk of my paycheque towards my automatic savings plan. Now, I benefit from using dollar cost averaging to invest my money on a regular basis.

I hate to admit it but choosing to invest in dividend products instead of equity products is one of my biggest money mistakes! Had I started investing in equity ETFs instead of dividend ETFs way back when, then I’d be in a position to retire today…even with the recent volatility in the stock market.

Sadly, this money mistake cannot be un-done. I have been investing in a dividend portfolio since 2011, instead of a broad-based equity exchange-traded fund. The financial media has spent the last 3 months talking non-stop about the pandemic’s effect on the stock market, and how it has brought the 10-year bull run to an end. It’s true – the market took a deep fall in March. However, it has bounced back. It’s still quite volatile, and – in my completely amateur opinion – the stock market will continue to be volatile for the next 2-3 years.

I’ve been forced to realize that one of my biggest mistakes with money was to delay investing in equity ETFs. I’ve only just started investing in equity investments in 2019! It’s true that I managed to catch almost the very tail-end of the bull market, but the smarter play would’ve been to start investing in equity ETFs back in 2011… ideally, back in 2006.

Water Under the Bridge

‘Tis true. I can no more turn back the hands of time than I can lick the spot between my own shoulder blades. We make our choices then we take our consequences.

I shouldn’t be too, too hard on myself. Nine years of consistent investing has yielded a nice little cash flow for me. While my monthly dividends are in the 4-figure range, they’re not quite enough for me to retire just yet. I equate my little army of money soldiers to income from a part-time job that I don’t have to actually perform. Truth be told, it’s nearly a perfect side hustle since it’s money I earn without the sweat off my brow. How cool is that?

So why am I divulging one of my biggest money mistakes to you?

Two reasons. First, people in the personal finance world don’t talk about their mistakes with money nearly enough. The only regular mention I see of this reality is on the ESI Money website, where the millionaires who are interviewed are asked about some of their errors with money. I think it’s important that people realize that everyone who is good with money has made their own mistakes with it. Like I said at the beginning, no one is born as an expert with money.

Secondly, I don’t think that there’s any reason for you to make this mistake yourself. You can just as easily learn from someone else’s mistakes as you can your own. The more information you have, the more likely you’ll be to make a decision that best fits your particular circumstances. I firmly believe that people make the best decisions they can with the information that they have at the time. When you know better, then you do better.

Hard-Won Truths

Money mistakes are unavoidable. Mine isn’t the worst one in the history of the world, and it certainly won’t derail my financial future. And, let’s be honest – I ought not complain too much. I earn a small boatload of dividends month in and month out. How bad of a decision could I have really made 9 years ago?

My investing journey isn’t over. And I’m sure that I will make different mistakes in the future, but I just don’t know what they are yet. I still have choices and options for my money. I can choose to continue building up my army of money soldiers. The other option is to start investing in equity ETFs and take part in the stock market’s recovery. I’m quite confident that the stock market will continue to trend higher. It’s recovered before, and it will recover again. A third option is to simply coast on what I’ve already invested a la Military Dollar, so that I can spend today’s money on today’s things – home renovations, landscaping, a new vehicle, spa treatments, whatever…

I want you to accept that mistakes with money are an inevitable part of investing. That’s why it’s so very vital that you continually learn about it throughout your life, and that you put what you learn into practice. Invest as much as you can as early as you can. Invest for the long-term. Keep your mitts off your investments by simultaneously building an emergency fund for those emergencies that will crop up in life. Live below your means and stay out of debt. Save, invest, learn, repeat – this is a recipe that works.

By following these foundational principles with your money, the impact of your money mistakes will be minimal rather than nuclear.

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Weekly Tip: Set timelines for your goal so you know which ones are short-term, which ones are medium-term, and which ones are long-term. Generally, short-term goals are the one to be accomplished within the next 12 months. Things like vacations and concerts would fall into this category. Medium term goals are one that take between 1 and 5 years to accomplish. Think new vehicle and down payments on a home or a business. Long-term goals are those that will take longer than 5 years. Common examples are retirement and paying off a mortgage. Once you have a timeline, then you’ll be in a better position to prioritize where your money goes and to segregate your money so that each goal is funded.