Hello everyone, and welcome to the Retiring Canada Podcast. In today’s episode, we'll discuss the Typical Canadian Investor vs. the Transformed Canadian Investor.
Specifically, we will cover:
- The old way vs. the new way
- The four key tenets of the typical Canadian investor
- The four traits of the transformed Canadian investor
- Three keys to investment success every Canadian should understand
- A few action items for you to consider
The investment landscape in Canada is fairly narrow-minded relative to our neighbors in the south. The primary reason for this is how the Canadian financial system is structured around the big banks.
These big banks control the majority of Canadians' retirement assets, leading to a deeply rooted, structured way of doing things. While the big banks have wealth management divisions capable of operating outside the branch level, I often encounter prospective and new clients whose retirement portfolios ignore evidence-based investing.
These portfolios typically lean towards in-house proprietary mutual funds or a random selection of stocks, creating the illusion that their wealth manager is actively doing something.
I understand this might sound harsh, and some of you may disagree with me today, which is fine. The discomfort in today's discussion stems from not wanting to believe we might be doing something wrong, especially with our money. My aim is to challenge your current approach, which I believe can be beneficial.
We should all be able to justify our financial decisions. If we can't explain our choices, listening to an opposing opinion might provide an opportunity for growth.
So, let's dive into today's topic: the typical investor vs. the transformed investor.
The typical investor in Canada is influenced by four key tenets:
1. They make decisions based on predictions.
2. They have a short-term horizon.
3. They rely on the hope strategy.
4. They live in perpetual anxiety.
Let's explore each of these, starting with making decisions based on predictions.
Imagine converting all your retirement dollars into chips at a casino and betting them on a roulette table. You might even hire a professional predictor to advise you on which numbers to pick. Perhaps this professional gets it right a few times, and your chips grow, but in the long run, the odds favor the house.
Now, think of your retirement portfolio. Whether you have a hand-picked stock portfolio or a mutual fund managed by professionals making predictions, this is called Active Management.
Evidence shows that, like in a casino, the market (the house) always wins in the long term. Markets are efficient over time, meaning predictors are weeded out, and markets prevail. For instance, data shows that over a 10-year span, 97% of Canadian equity fund managers underperform the market, leaving you with only a 3% chance of picking a successful manager or stock picker.
Would you rather be the person betting at the roulette table or the owner of the casino?
The second key tenet: typical investors have a short time horizon. Making decisions based on predictions leads to frequent buying and selling, resulting in higher commissions and increased turnover and taxes, which are costs passed on to you.
In mutual funds, these costs appear in the trade expense ratio (TER) and your tax slips at year-end. These additional costs can be burdensome, especially if not managed properly by the fund manager.
I experienced this firsthand at a previous company. They allowed an investment position to accumulate a substantial deferred capital gain. While this means your money increased on paper, if you bought the mutual fund just before they triggered this gain, you would be responsible for the tax bill, just like long-term holders.
This is akin to paying a year's worth of property tax for a house you bought on December 15th—it doesn’t make sense.
The third key tenet: typical investors rely on the hope strategy. Hope isn’t a strategy retirement investors should depend on. Hoping you won’t run out of money, hoping your investments will perform well, hoping to minimize tax, and hoping to predict successful stocks—hope alone isn't sufficient.
Typical Canadian investors should adopt an evidence-based investment approach and create a solid financial plan tailored to their goals.
The fourth key tenet: typical investors live in perpetual anxiety. Predictions, increased costs, and a reliance on hope lead to stress. As a retirement investor, you don’t need added stress during this chapter of your life.
Eliminating anxiety and stress is crucial, and this is where transitioning from a typical investor to a transformed investor makes all the difference.
So, now that we’ve outlined the four key tenets of the typical Canadian investor, let's shift to the four traits of the transformed Canadian investor:
1. They make decisions based on a plan.
2. They have a long-term time horizon.
3. They utilize an evidence-based strategy.
4. They invite calmness and consistency into their lives.
Starting with number one: they make decisions based on a plan. A thoughtfully developed plan is the foundation of the transformed investor. This plan should be tailored to your unique circumstances, focusing on investment allocation, income planning, tax planning, healthcare planning, and estate planning.
These fundamentals ensure you have a well-considered action plan ready to implement when life throws you a curveball. A market downturn, the passing of a spouse, a health emergency—the transformed investor has a plan for these situations.
The first step in this process is ensuring proper investment allocation, the heart of your plan. To become a transformed investor, you need to eliminate predictions and create an investment plan based on evidence.
Number two: transformed investors have a long-term time horizon. The financial markets have rewarded long-term investors. People expect positive returns on the capital they supply, and historically, equity and bond markets have provided growth that outpaces inflation over the long term.
Research shows little evidence of consistent success in outguessing the market. This means moving away from short-term stock pickers and market timers and adopting a long-term, market-based approach.
We trust market prices and believe the public markets are efficient. Building a plan on long-term truths, not short-term speculation, allows for a more tax-efficient and sustainable approach.
Number three: utilizing an evidence-based approach. The market is an effective information-processing machine, with billions of dollars in trades each day helping set prices. This pricing power works against fund managers trying to outperform through stock picking or market timing. As mentioned earlier, only 3% of Canadian equity funds have outperformed their benchmarks over the past 10 years.
The evidence is clear.
Number four: the transformed investor is calm and consistent. Creating a comprehensive plan considering investment allocation, income planning, tax planning, healthcare planning, and estate planning allows you to spend less time worrying and more time enjoying your retirement years.
The first step to becoming a transformed investor is to rethink how you invest and discover an evidence-based approach to securing your retirement.
Before we discuss today's action items, here are three keys to investment success that all Canadians should understand:
1. Markets work.
2. Costs matter.
3. Diversification is essential.
If you’re ready to become a transformed investor, visit Fundamentalwealth.ca to learn more about our investment philosophy and start your wealth management journey.
Now, for today's action items:
1. Do your own research. If today’s discussion made you question your retirement portfolio, now is the time to dive in and investigate. Start by visiting the website linked in the description. Be prepared to encounter advocates of active investing, especially those with an interest in keeping you in high-fee mutual funds.
2. Becoming a transformed investor involves more than choosing low-cost exchange-traded or factor-based funds. You need a holistic plan that includes proper investment allocation, retirement income planning, tax planning, healthcare planning, and estate planning. An investment alone isn’t a retirement plan.
3. High-fee mutual fund proponents may tout their funds' ratings, downside risk protection, and star fund managers. While some funds limit market drawdowns in the short term, a well-balanced, evidence-based approach with a comprehensive retirement plan provides the highest probability of long-term success. Don’t settle—take action for the stress-free retirement you deserve.
That wraps up today’s episode.
Be sure to sign up for my weekly Retiring Canada newsletter. And remember, when it comes to your retirement, don’t take chances—make a plan so you can retire with confidence.
All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.