Answers to

Practical Questions

Mistake #1 – High-Cost Mutual Funds

If you (or your advisor) has purchased a mutual fund from one of the Big Five Banks (i.e., RBC, TD, BMO, Scotia, or CIBC), or life insurance companies (i.e., Sun Life, Great West Life, or Manulife), or you have a mutual fund from AGF, CI Investments, Dynamic, Fidelity, Franklin Bissett (Templeton), Investors Group, Mackenzie, or Sentry, you may well be paying a management expense ratio (MER) of about 2% or higher. According to the Investment Funds Institute of Canada, 68% of all mutual funds sold in Canada are high cost “Series A” mutual funds.

Full disclosure, I own shares in RBC, TD, Scotia, as well as Manulife and Sun Life, BECAUSE they make huge profits by selling high-cost mutual funds to the unsuspecting public, generating great returns and raising share prices for their shareholders.

Mistake #3 – Making Too Many Investment Decisions

Every time you decide to buy or sell a stock or ETF, you are creating an opportunity to make a mistake. All investors, including sophisticated “money managers,” have biases and emotions that can lead to investment mistakes, every time a buy or sell decision is made (a phenomenon known as behavioural finance). Examples include confirmation bias, herding, and worry/anxiety (please see below for definitions of these biases and mistakes, as well as a partial list of other behaviour biases/mistakes).

For individual investors, the profitable and lazy solution for long-term investing success is to reduce the number of buy/sell decisions you make. This is easily achieved by being lazy, and limiting the number of investment decisions you actually make, by having a buy-and-hold philosophy, together with a diversified, low-cost ETF portfolio.

Several research studies suggest behavioural biases that lead to investment mistakes can cost an investor at least 1% per year, and some studies suggest more than 2% per year.