Tag Archives: indexing

Robb Engen’s 4 biggest Investing Mistakes

Learn from your mistakes - motivational words on a slate blackboard against red barn woodI was 19 years old when I first started investing. I diligently set aside money every paycheque, starting with $50 every two weeks and eventually increasing that to $200 per month, to save for retirement inside my RRSP. Sounds like I was off to a great start, right? Wrong!

 

Even though my intentions were in the right place, my first attempt at investing was a complete disaster. Here’s why: I didn’t have a plan

It’s good practice to save a portion of your income for the future, even at a young age. The problem for me was that I was still in school and didn’t have a plan – I had no clue what I was saving for.

I had read The Wealthy Barber and The Millionaire Next Door and so I knew the earlier I started putting away money for retirement, the longer I’d have compound interest working on my side, and the bigger my nest egg would be.

Unfortunately, I was saving for retirement at the expense of any other short-term goals, like paying off my student loans, buying a used car, or saving for a down payment on a house.

I didn’t have any short-term savings

Speaking of RRSPs, what was a 19-year-old kid doing opening up an RRSP when he’s only making $15,000 per year?

There were no real tax advantages for me to save within an RRSP when I was in such a low tax bracket. I’m sure I blew my tax refunds anyway, so what was the point?

Granted, the tax free savings account hadn’t been introduced yet, but I would have been better off using a high interest savings account for my savings rather than putting money in my RRSP.

I didn’t have a clue about fees and tracking performance

Like a typical young investor I used mutual funds to build my investment portfolio. I was encouraged by a bank advisor to select global equity mutual funds because, as I was told, they would deliver the highest returns over the long term.

What the bank advisor didn’t tell me was that the management expense ratio (MER) on some of those mutual funds can be 2.5 per cent or more, and high fees will have a negative impact on your investment returns over the long run.

Bank advisors also don’t tell you which benchmark these funds are supposed to track (and attempt to beat) so when you get your statements in the mail it’s impossible to determine how well your investments are doing compared to the rest of the market.

I drained my RRSP early

I didn’t have a good handle on my finances in my 20s and often resorted to using credit cards to get by. Without a proper budget in place, and no short-term savings to fall back on in case of emergency, I had no choice but to raid my RRSPs to pay off my credit-card debt and get my finances back on track.

Taking money out of my RRSP early meant paying taxes up front. Withdrawals up to $5,000 are subject to 10 per cent withholding tax, while taking between $5,000 and $15,000 will cost you 20 per cent, and withdrawals over $15,000 will cost you 30 per cent.

Your financial institution withholds tax on the money you take out and pays it directly to the government. So when I took out $10,000 from my RRSP, the bank withheld $2,000 and I was left with $8,000. In addition to the withholding tax, I also had to report the full $10,000 withdrawal as taxable income that year.

While I can’t argue with my reasons for selling, my dumb decisions beforehand cost me a lot of money and left me starting over from scratch.

Final thoughts

We all make investing mistakes – some bigger than others. If I had to do things over again today I would have done the following:

  1. Create a budget – A budget is the foundation for responsible money management. Had I used a budget and tracked my expenses properly from an early age I would have lived within my means and kept my spending under control.
  2. Open a tax free savings account – Yes, the TFSA wasn’t around back then but for today’s youth it makes much more sense to save inside your TFSA instead of your RRSP like I did. You can put up to $5,500 per year inside your TFSA and withdraw the money tax free. You contribute with after-tax dollars, so you won’t get a tax refund, but you’ll likely be in a low tax bracket anyway, so contributing to an RRSP won’t give you much of a refund either.
  3. Make a financial plan – We all have financial goals and even at a young age I should have identified some short-and-long term priorities to save toward. I’d take a three-pronged approach where I’d use a high interest savings account to fund my short term goals, my TFSA to fund mid-to-long term goals, and eventually open an RRSP to save for retirement. No doubt I’d be much further ahead today if I took this approach earlier in life.
  4. Use index funds or ETFs – Now that I understand how destructive fees can be to your portfolio, I’d look into building up my investments using low cost index funds or ETFs. The advantage to using index funds is that you can make regular contributions at no cost while achieving the same returns as the market, minus a small management. Some brokers also offer free commissions when you purchase ETFs.

Did you make similar mistakes when you first started investing? How did you overcome them?

 RobbEngenIn addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on August 7th and is republished here with his permission.

 

When to buy an ETF for maximum return

 

To determine when to buy an ETF, some investors use technical analysis and other tools. But you need to dig deeper.

ETF-25Y-medallion-ROUND-ENInvestors often wonder: what is a good entry point when purchasing a stock or an ETF?

The first question before asking when to buy an ETF is whether an exchange traded fund investment is right for your portfolio. An ETF investment is one of the most popular and most benign investing innovations of our time. ETF investments are a little like conventional mutual funds, but with two key differences.

First, ETF investments trade on a stock exchange throughout the day, much like ordinary stocks. So you can buy them through a broker whenever the stock market is open, and generally you pay the same commission rate that you pay to buy stocks. In contrast, you can only buy most conventional mutual funds at the end of the day. What’s more, commissions vary widely, depending on negotiations with your broker or fund dealer.

Second, the MER (Management Expense Ratio) is generally much lower on ETFs than on conventional mutual funds. That’s because most ETFs take a much simpler approach to investing. Instead of actively managing clients’ investments, ETF providers invest so as to mirror the holdings and performance of a particular stock-market index.

ETFs practice this “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Traditional ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poors). Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks change. They don’t attempt to pick and choose which stocks they think have the best prospects.

This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.

When to buy an ETF

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Vanguard unveils four single-factor actively managed ETFs

MM30087LOGOVanguard Investments Canada Inc. has launched four new actively managed ETFs that began trading on the TSX on June 22. In a press release, the company said they are the first actively managed Exchange Traded Funds it provides in Canada.

In the U.S., and despite its strong image as a provider of low-cost “passive” index-tracking strategies, The Vanguard Group Inc. has had a long track record with actively managed strategies and, with almost US$1 trillion in global actively managed assets, is one of the world’s largest active managers.

The new “active” products are managed by Vanguard’s Quantitative Equity Group (QEG), which has existed since 1991. Each of the new ETFs will have a management fee of 0.35%. (Final MER may be slightly higher after fees and expenses).

The four new ETFs are:

Vanguard Global Minimum Volatility ETF, ticker VVO.

Vanguard Global Value Factor ETF, ticker VVL.

Vanguard Global Momentum Factor ETF, ticker VMO.

Vanguard Global Liquidity Factor ETF, ticker VLQ.

For more on the development, see this link on the company’s website.

Index mutual funds or ETFs?

patmckeough
Pat McKeough

By Pat McKeough, TSINetwork.ca

Special to the Financial Independence Hub

Index mutual funds can provide a low-cost way to invest in the stock market. However, they have disadvantages and there are better alternatives.

Index mutual funds are among the better financial innovations to come along in the past few decades. These are specialized mutual funds that invest so as to come close to equaling the performance of a market index, such as the S&P/TSX 60.

Index mutual funds do show better long-run performance than more than half of all actively managed mutual funds with long-term track records. That’s partly because index fund fees run around 1.0% of assets per year, compared to 2.5% or more on many broker-sold mutual funds.

One big advantage of index mutual funds is that they can help you avoid the risk of choosing a fund with a management style that virtually guarantees below-average long-term performance.

For example, mutual funds that pursue a trading or sector-rotation approach to investing belong in this can’t-win category. Managers of these funds try to out-perform the market by betting on relatively short-term trends, rather than putting their investors in a position to profit near automatically from long-term growth in the economy. This can work, but only for limited periods.

In any one year, the top fund is often run by a market timer who is having his or her proverbial “day in the sun.” In any one decade, however, the top funds are generally run by conservative managers who focus on long-term growth in the economy.

Spread investments across five main economic sectors

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Video: the age-old debate of active management vs. indexing

Screen Shot 2016-05-23 at 3.03.36 PMWhen it comes to investing philosophies, there are two camps that are almost diametrically opposed: so-called “active” security selection practiced by mutual funds, hedge funds and similar vehicles; and the low-cost “passive” approach epitomized by index funds and ETFs.

A good summary of this old chestnut can be found in the latest FWB TV video, which runs just under four minutes. It can be found by clicking on this highlighted link: He said, she said: the active versus passive argument.  In the investment industry, “she” is correct and her name is SPIVA® (S&P Indices Versus Active).

Is Mr. Active telling us the whole story?

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