Investing money is an activity made up of a mixture of hope, fear, regret, desire, security, ego, greed, doubt… No wonder the majority of us are royally screwed up .
To have a good 2023 in the markets, here is a list of the seven biggest mistakes made by investors, whether beginners or experienced.
1. Not investing
The biggest mistake is not to invest. Working without keeping part of your pay for yourself is a bit like being a hamster running in its wheel: you move a lot, but you don’t go anywhere. Worse, we enrich others (coffee shop owners, clothing store owners, cell phone company owners, etc.) by giving them all our dollars, and even more than all our dollars when we go into debt. Personally, I think saving 10% of your salary is the basics, but investors can start with smaller amounts: $100 a month is $3.33 a day. Within reach of many people.
2. Invest according to the news
Is a recession imminent? Will the Republicans stop the United States government from paying its bills? What was John Legend thinking when he found his daughter’s name? These hot topics dominate the news. That doesn’t mean they have to affect us as investors. Stopping investing because the unemployment rate is rising or trying to predict the direction of the market in view of a possible recession are errors since the market is unpredictable in the short term. The best thing is to put our investments on autopilot and invest every payday without even thinking about it. And, don’t forget: if you’re not retired, you should pray that the market will fall, since every dollar invested buys more investments when they are down.
3. Try to beat the market
Bad news: almost all amateur and professional investors are unable to beat stock market returns. Good news: beating market returns is not necessary to find your place among the best investors in the world. All we have to do is buy the whole market, through exchange-traded funds (ETFs), fund our investments with fresh money, and be patient. A diversified and balanced portfolio composed of 60% Canadian, American and international equities and 40% bonds has had average annual returns of 8.6% over the past half-century. $10,000 invested this way 50 years ago is worth more than $675,000 today. Add $1,000 a year in investment over that period and we’re at 1.4 million. Investing is simple, but not easy.
4. Fear market falls
When they occur, market falls make headlines, but in reality they are necessary to ensure the long-term growth of our assets. Panicking because the market is falling is as logical as panicking because it snows in January. Falls are the exception: since the 1930s, North American stock markets have been up almost 7 out of 10 years. On this subject, every investor is different, and those most prone to react better entrust their investments to a professional who could help them keep a cool head in the falls. Those who are unaware of, or unaffected by, falls are better able to manage their investments themselves in accounts like those offered by Questrade or WealthSimple, or a discount brokerage account with financial institutions.
5. Lacking patience
Investing and getting rich are life projects. Think in decades, not years. It is over the long term that our investments really begin to multiply because of the phenomenon of compound interest, which is simply interest earned on interest, causing a snowball effect. Investor Warren Buffett is worth 108 billion today. More than 107 billion of this sum was accumulated after he had celebrated his 55th birthday.
6. Do not minimize taxes
Unlike the gains from the sale of a principal residence, investors must pay tax on half of the gains they make on the stock market, half of which is simply added to their income in the year in which the investments are sold. To avoid this, we can hold our investments inside an RRSP, where the contributions are deductible from our income, and the gains will be taxed only on exit, ideally when we earn less money, in a sabbatical year. or retired for example. Or in a TFSA, whose contribution limit has just been raised to $6,500 this year, and where our investments can grow and remain tax-sheltered even when we take them out of the TFSA – that’s our personal tax haven. If you are a parent and have not opened an RESP for your children, stop reading this text and go do it: you are missing out on a guaranteed 30% subsidy paid by our governments on your annual contributions of $2,500 per child.
7. Complicate things unnecessarily
Owning ETFs means investing in thousands of companies in different industries around the globe. In short, this is the very essence of diversification. To name just one, the all-in-one Vanguard Balanced ETF Portfolio (VBAL) fund contains 13,639 publicly traded companies and 17,996 government and corporate bonds. No need to add anything else to it. As financial author Jason Zweig notes, “If you think investing is good, you’re not doing it right. Investing should be a mechanical, repetitive process. It’s hard for people to accept that. »
The question of the week
What mistake have you ever made with your investments?