11 Important Lessons I've Learned About Investing

I have to admit for most of my life I've sucked at investing. Bought expensive mutual funds, check. Sold at the bottom, check. Bought at the top, check. Invested in gold penny stocks, check. Continued to invest in products I didn't understand, check.

Debt was another big component of my life until we paid off our mortgage. I have not turned into some kind of wunderkid investor, but rather just more informed. It is only by making these mistakes have I truly learned how to invest my money.

I try not to obsess about all things money and at my age why bother. If you haven't made it financially by the time you reach your sixties and have worked all your life and spent most of it in debt, then when will you make it? I hope I have learned something but these are what I believe to be the most important;

Hot Tips

Everybody it seems has one for you. I have fallen for this many times. The latest being Klondex Mines. I met a guy when I was admitted for hernia surgery, he was a broker and mentioned this as a good investment. I trusted his experience and knowledge which cost me 50% of my money on that dog of a stock. It has just recently been bought by Hecla a US silver miner. Just ignore word of mouth recommendations. They rarely work out and I have only myself to blame.

Be A Contrarian

When everyone is heading in the same direction, you do the opposite. Look to sell losers when the market is higher and buy stocks when the market declines. This is how you win long term. Always think long term as being at least 10 years out.

Fight Complacency

Never be so arrogant as to think markets will go up forever and you'll be OK. Stick to your plan and never deviate. The market moves in cycles so always be aware of where we are in that cycle. Just because everyone is doing something doesn't mean it's right and that the good times will continue.

Asset Allocation

Hold a little cash, a little fixed income and a little bit of equities, You can't go wrong and won't lose as much when the market goes down. The market will correct 3-4% at least 3-4 times a year. This kind of a split in your money will save you from doing stupid things with your money. Only losers buy at the top and sell at the bottom.

Be Tax Smart

Know where to put your investments to take advantage of the generous credits and deductions we have in Canada. Know what is taxed as a capital gain, a dividend or interest. If it collects interest then it should be held in a sheltered account like your RSP or TFSA. Equities and equity mutual funds if you own them should be held in an open account. Become a tax smart investor. It's not the people who make the most that get ahead. It's those that pay the least amount of tax. Fact!

Understand The Economy

Understand where we are in the economic cycle. Recession, Inflation, Deflation, Prosperity. Where are we? Is it easy money days, are interest rates rising or falling? These conditions are temporary and none last forever. Ignore the latest news and never buy or sell based on it. Ask questions, talk to people in the know if you can. Timing can be critical to protect your investments, so know where you are at all times. Remember that when everyone is panicking and selling these are the greatest buying opportunities. When everyone is confident and bullish, is usually the time to book profits and sit on the sidelines in cash.

Work Backwards to Set Goals

Whatever your age work backwards from your investing priorities. If you've determined that you're going to need $1,000,000 at age 65 to retire, and you're just starting to invest with twenty five years left, then investing in GICs and Fixed Income Products won’t get you there. 

Find a mix of assets that WILL get you to your goal. Focus on what you will achieve for your future, NOT what small amount you have to start with. This long-term thinking way of thinking is a must.

Use Good Debt

Not everyone is comfortable borrowing to invest. Whatever you do make sure your spouse knows what you are doing and seek approval. You can deduct the interest on loans made to buy investments. This is good debt and the rich get richer by deploying strategies like this. Wherever you can, use good debt. 

Maximize the use of TFSAs and RESPs. You can even make your mortgage tax deductible if you seek professional help. Take advantage of RRSPs and RRIFs. Canada is a beautiful place that allows us all to avoid, defer and minimize what we pay to the tax man. Take advantage of this and save on taxes and use good debt if you can.

Know Your Limit

A good rule of thumb to use to determine how much exposure you should have in the stock market is quite simple - deduct your age from 100. In my case I'm now 62 so I shouldn't have more than 38% invested in equities. Due to the low returns in cash and bonds at present I have a lot more than that. Closer to 100% individual dividend growth stocks. My wife is 57 and she has a balanced portfolio with a 60/40% mix in 2 different accounts. This is appropriate for most people.

Too Much House

Most families have too much of their net worth tied up in their house. Take ninety, then minus your age, this will give you the percentage of your total net worth a house should represent. This according to Garth Tuner over at the greaterfool.ca. So again using myself, 90-62 = 28. My principal residence should not represent more than 28% of my net worth. 

We paid off our house 7 years ago and right now it represents 25% of our net worth or one-quarter. Most Canadians have far too much of their wealth tied up in their house and have zero invested in liquid financial assets like stocks or bonds. 

You can't sell your house if you need money. It's a fixed asset. On average it will take you 3 months to sell and enjoy any gains you receive. You might also sell and take a loss, it happens. This is risky and another good reason to NOT have all your eggs tied up in the housing basket. Diversify! 

Go Pro or Do It Yourself

I'm a DIY investor. I've just learned over the years that nobody cares or will care more about your money than you do. I've had mutual fund salesman sell me stuff and fleece me on fees. You have two choices. Get advice or do it on your own.

I believe in getting educated and the DIY investing route. There really is no in between. If you are just not comfortable then by all means hire someone. 

An advisor will charge you 1% a year to manage your investments while taking no commissions. That's it but also on top of any funds or ETFs they put you in. Money from the fund companies will be extracted monthly from your investments. I spelled this all out in The Greater Fool Balanced Portfolio.

Would you pay these fees for peace of mind? It could add up to at least 1.5% on an ongoing basis. You can do this all yourself of course but you'll need to learn and be involved as much as your time and life permits. Do what you know and keep things simple. Keep risk as low as you can. 

You don’t need an advisor to succeed, not at all. Read Buffett, Munger, Fisher, Montier, Grant, Bogle and Ellis and follow their advice. The internet is full of great free advice and so is your library. Use it. 

DIY or hire someone? Those are your choices. What will you choose?

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