How I used to sabotage my portfolio

In fact, we used to sabotage our portfolio and our personal finances. We really didn’t know what we didn’t know.

Over the years we’ve learned some financial lessons and so today’s post updates those lessons so you don’t have to make the same mistakes I did. In fact, should you find yourself in one of these financial ruts below this post will go a step further and offer some tips on how to dig out of them.

I should know, I made these changes below!

Here is how I used to sabotage my portfolio – and what you can learn from it.

1.) Investing in high-priced mutual fund products

In my 20s, I invested in mutual funds that charged money management fees close to 2%. Back then I simply didn’t know how much those fund fees would eat into my investment returns. On top of that, I had no idea that most mutual fund managers had no long-term hope of beating their benchmark index, even after a few years let alone after many years.

This is because of this key reason: it is incredibly difficult to overcome the deficits incurred by some funds due to high money management fees charged.

High fund fees basically mean you’re already striving to play catch-up to market-like returns.

Needless to say, we don’t invest in any costly funds any longer. I ditched the mutual fund industry about a decade back now – a decision you can read about including the costly math behind it here.

This is not to say there are not a few mutual funds in Canada, and the companies that manage them, that continue to shine in terms of long-term performance – thanks to their lower-cost structure and diversified approach over their competitors. Lower-cost solutions such as Tangerine funds, Mawer funds and some TD Bank products (e-series funds) come to mind.

If you’re just starting out, you can read this post about some of those alternatives.

You can also now consider some simple all-in-one funds to help you with your investing solutions.

The bottom-line: since lower money management fees are a major predictor and input into future investing gains, it’s best to keep more of your hard-earned money working and less money going out to management fees that offer little to no long-term value.

Beyond my links above, do check out my ETFs page for some of the best, low-cost, diversified funds to own. I’ve also highlighted which ones I own and why!

2.) Lacking diversification – it’s a free lunch!

Did you see the current pandemic coming?

Can you predict gold prices later this year?

I thought so. Same here.

At the end of the day, I have no idea what the future holds. Don’t let any financial expert tell you they know either.

Nobody can predict the future with any accuracy what will happen next. This is why for long-term investing success we should strive for diversification, but it wasn’t always that way for me.

In those aforementioned 20s, the younger My Own Advisor Do-It-Yourself (DIY) investor threw tons of money into tech stocks in the late-1990s. The internet (for those millennials reading this post!) was actually a new thing then.

So, between 1995 when I just started to invest, until the peak of March 2000, the tech-focused NASDAQ Composite Index rose some 400%, only to crash nearly 80% by October 2002. It was a massive bubble and killed many investors portfolios as it crashed. Part of mine was included in this rise and fall!

Thankfully I didn’t lose it all. I had some diversification back then. I have more now.

My lesson learned from the dot-com crash?

First, don’t put everything into tech stocks. Sectors can rise and fall on a whim.

Second, diversify. What I mean is, own different companies in different sectors and beyond that, own companies who operate and derive their revenues from many different countries from around the world.

It has been quoted many times that “diversification is the only free lunch” in investing. This quote is attributed to Nobel Prize laureate Harry Markowitz.

I like to think of diversification this way – it’s a risk management tool.

Sure, you can get very wealthy owning some tech stocks. Looking at you Amazon, Apple, Microsoft and a few others!

But remember, at any point in time, the same things that can make you wealthy are the same things that can make you poor. Diversification ensures you are mitigating portfolio risk.

In my 40s now, I continue to read-up and learn more about how diversification can be better for my wealth preservation in the years ahead.

To address that, although I continue to have a bias to Canadian and some U.S. dividend paying stocks, I am owning more low-cost ETFs that hold companies from around the world.

I believe you should at least consider the same for your portfolio.

Over time, I’ll keep you posted on what I own, what I buy, and why on this site.

3.) Not embracing market calamity

As a novice investor I was very guilty of chasing the hottest products/funds. In my 20s I not only paid sizeable money management fees (see above) I also chased the performance of those funds.

That was a real double-whammy.

We’ve all heard the investing mantra to buy low and sell high but I was really doing the opposite of this strategy – buying hot and selling what’s not.

I remember I did so because I found it difficult to read and hear stories of other investors getting wealthy off some iron-hot asset class every few months – unfortunately the one I wasn’t holding at the time.

What I realized over time is if you chase performance there is a good chance you’ll own what is overvalued. I learned there is a better strategy…it’s better to buy assets when they are out of favour. This doesn’t mean speculating as much as it means rebalancing your portfolio when market calamity strikes.

In my opinion, here is a great two-step recipe for what can work for you when any market correction happens (something I practice myself):

1. Learn from history – reset your expectations

A sudden stock market crash can be quite unnerving but the reality is, over time, it’s expected to happen. History continues to tell us so.

2. Learn from history – buy when stocks are on sale

The fact that equity markets have done well over the last decade, let alone generations (despite the occasional very scary bump) should be a reminder that stocks remain a great long-term investment to build wealth.

Consider your answers to these questions:

• Would you buy more gas for your car if it dropped 20% at the pumps?
• Would you buy more groceries and toilet paper if it was on sale during the impending viral apocalypse? 

Of course you would.

Why it is that stock market investors are in panic mode when prices drop? I think anyone in their asset accumulation years should be praying for low stock prices for years to come. I do!

Over the last few years I’ve learned to train my investing brain.

I’m inclined to make new purchases in established dividend paying stocks when they are out of favour – when their market prices have fallen and when the talking heads are beating these companies up.

I continue to rebalance the Canadian portion of my portfolio by leveraging ETF XIU – and aligning my stock allocations to be somewhat in line with that fund.