By Randy Cass
Special to the Financial Independence Hub
Let’s start with a question: what is good investing?
I define good investing as a means to an end. You figure out your current financial situation, look at your life goals, think about your time horizon and ability to tolerate risk and then you create a solution that fits you specifically.
With this definition in mind, let’s look at three myths about good investing.
Myth #1: Only the rich can afford good financial advice.
The good news is that it’s now possible for the average Canadian investor to get the type of service that used to only be available to people with millions of dollars. The combination of smarter technology and low-cost products, such as ETFs alongside with new companies like Nest Wealth – who advocate that every investor deserves a high level of service, not just those with millions of dollars – means we’re well on our way to solving this problem.
So yes you can get a customized portfolio – created for your specific situation and managed on a continual basis – and have all the boring stuff taken care of on your behalf. Important things that would put most people to sleep – like rebalancing, risk assessment and diversification – can now be handled for all investors at a much lower cost than ever before.
Myth #2: You need to stock pick or beat the market to succeed.
At a basic level, this myth incorrectly assumes two things. First, that people who use active investing actually outperform those who use passive investing. And second, that you have to stretch your risk comfort level to do well.
Guess how many actively managed mutual funds outperformed the market consistently from 2010-2014? A study by the S&P Dow Jones team looked at the funds with performances in the top 25% over the 12 months preceding March 2010. Of that group, only 2 remained in the top 25% for the next four years. Just 2 out of 2,863. Think about that!
The best investors in the world, including Burt Malkiel, Jack Bogle and David Swensen, are in it for the long term. They focus on proper diversification, systematic rebalancing, appropriate risk and reducing fees. Even many famous active investors, like Warren Buffett, state that if you can’t dedicate 100% of your time to stock picking then you should invest in passive ETFs. I suggest that it would be a good idea to follow their example.
Myth #3: You don’t pay to invest in mutual funds.
You definitely pay to invest in mutual funds. What you don’t see is how much you are paying. Most fund companies do not separate the growth of your portfolio from the cost of running it. This creates a mindset that fees are not important and means as investors we only look for performance on our investment statements.
But, according to Morningstar, Canadians pay the highest fees in the world to invest in mutual funds. And, typically because of these fees, an investor in a fund will usually end up underperforming the fund’s benchmark. Controlling fees matters more than almost anything when it comes to building your nest egg.
Randy Cass is the founder of NestWealth.com, bringing more than 15 years experience in the financial services industry. Previously Randy managed quantitative portfolios at the Ontario Teachers’ Pension Plan and institutional assets at Orchard Asset Management. His previous company, First Coverage, won multiple awards as a top start-up including a financial services Morningstar award for best use of Technology in Canada before it was ultimately sold in 2011. Randy hosted Market Sense on BNN between 2012 and 2014.