Welcome to an Amygdala Mail, where I answer some of your questions about money. Today we talk about the guilt of going to Tim Hortons, the idea of firing your financial advisor, a disappointing investment, and an investment in the NASDAQ 100 index.
Let’s start with a super-saver reader who wants to drink his coffee in peace, without having to bear the accusatory gaze of this column.
“The American financial author Ramit Sethi advocates a no-budget approach, based instead on choices of principle,” he writes. For example, if I want to treat myself to a famous Tim Hortons coffee every day because it’s my pleasure, then I do it. What is your opinion on this approach? I have a budget, but I added a “fun” category to it even though I saved $30,000 last year. At 26, I don’t want to live only thinking about retirement. »
Congratulations on your savings: $30,000 in one year at age 26 is impressive. Next, Ramit Sethi recommends making a budget. It offers four categories: fixed costs (mortgage, rent, groceries, etc.), investments (long-term financial investments), short-term savings (vacations, birthday gifts, vehicle maintenance, etc.), and spending for pleasure (the famous Tim Hortons coffee).
The idea is that spending “for pleasure” is not 100% pleasant when our investments are zero, or we have not put money aside for our vacation. Seen from this angle, making a budget does not put our life in a corset: it frees us, and rather allows us to spend without stress on things that make us happy. As long as you don’t harm yourself, you’re on the right track.
That can definitely include a daily coffee at Tim Hortons. But definitely if there are 20 people in line in front of you, I’m going to judge you.
Now let’s welcome Luc, who thinks I should stop being stupid and tell people to fire their financial advisor.
“Why don’t you advise your readers to mature a little, stop dealing with a financial advisor, go to discount brokerage accounts and buy exchange traded funds (ETFs) themselves? ? he asks. The advisor works first for himself. He seeks to have commissions, and secondarily to grow the saver’s capital. »
As self-directed investors, it’s tempting to think that what works for us will work for everyone.
But you should see the emails I receive. People have 1001 questions, on 1001 aspects of investing. Our society has never been so rich, so educated. But there is a huge blind spot when it comes to putting our money to work.
And so I should suggest to a 56-year-old person who has never shown any interest in the stock market before this year to start managing their $60,000 (or $600,000) for their retirement on Disnat? Because a financial advisor makes money somewhere in the equation?
A financial advisor can help us understand our investments. Prevent us from selling at the wrong time. Motivate us to save more. Or all of that at once. It can have a huge impact.
If an advisor offers investments that provide us with stock market returns based on your appetite for risk and at low management fees (a little over 1% per year in total; at 2% or more, look elsewhere) , I do not see where the problem is.
Those who want to pay even fewer fees can look into a managed portfolio from a company like Questrade or Wealthsimple. Or, yes, manage their own investments in a discount brokerage account. It’s simple, but just because it’s simple doesn’t mean it’s easy. Especially when a year 2008 or 2020 arrives and reminds us that we don’t control much, ultimately.
Next, Karen would like to know what to do with an investment that did not have the desired result.
“I bought a dividend stock that fell a lot [40 %] for two years, she writes. The stock has not paid a dividend for a year. This represents only 5% of my portfolio, but I’m wondering if I should sell it or wait for it to rise and limit the losses. The rest of my portfolio has ETFs that are doing very well. »
When we look at an investment that has lost value, our brain is often caught in the grip of the sunk cost fallacy (sunk cost fallacy in English). We paid a good amount, the result is disappointing, so we’re trying to see how we could rewrite the end of the story.
But we have no control over the past or the future. We can only intervene in the present.
Not touching your investment portfolio is implicitly making an investment choice. The person who has been investing for years and has $25,000 in a stock is in exactly the same position as the person who bought $25,000 worth of that same stock this morning.
Therefore, the question you should ask yourself is: If I were to invest money today, would I buy this company’s stock? If the answer is no, you should sell and invest the money elsewhere.
Finally, a 23-year-old graduating college reader wants to put his money in an ETF that tracks the S&P 500 index in his discount brokerage account. “For some time now, I have wanted to invest part of my funds in the NASDAQ 100,” he wrote. The fact that this index is technology-focused is very interesting for the future. What do you think ? »
Well done for being interested in all this at your age: you’re a step ahead of a lot of people. Next, I often talk about the S&P 500, because it is the index with the best historical data. But studies show that in addition to American stocks, it is optimal to also have exposure to Canadian and international stocks.
Few people realize it, but American stocks have underperformed international stocks excluding the United States in five of the last seven decades, according to calculations by the firm PWL Capital. Yes, the S&P 500 is the Taylor Swift of the investing world right now. But no one knows what the future holds, so it’s a good idea to be diverse.
For the NASDAQ 100, which includes the 100 largest technology companies in the United States, of course it’s the future. But everyone knows it’s the future. Stock prices already reflect this optimism, so tomorrow’s returns may be less exciting than yesterday’s.
Also, the NASDAQ 100 is made up of several companies that are already in the S&P 500 (Apple, Alphabet, Nvidia, etc.). So there is a risk of having overexposure to the American market.
Among the most popular diversified equity funds with exposure to the US, Canadian and international markets among self-directed investors are the Vanguard Equity ETF Portfolio (VEQT), the iShares Core Equity ETF Portfolio (XEQT), or the BMO All Equity ETF (ZEQT). These funds have annual management fees of between 0.20 and 0.24%.
Versions of these funds also incorporate 20% bonds, and may fall less in stock market storms. These are the VGRO, XGRO, and ZGRO funds.
Diversification between sectors and geography will always mean that one part of our portfolio will perform less well than another. This is not a fault. It’s a sign that we can handle whatever the market throws at us – the negative and the positive.
Receive the newsletter every Monday Money and happiness