I'm an entrepreneur, so I spend most of my days looking forward. It's not worth my time or yours to dwell on past mistakes -- unless you plan to learn from them. It's in that spirit that I list the biggest investing mistakes we saw Canadian investors make in 2015.
Cashing out in market volatility.
The single biggest investing mistake people make is trying to time the market, either out of overconfidence or out of sheer panic. Over the past 30 years, equity fund investors have made less than 4 per cent annually in the market, compared with an 11 per cent return for the S&P 500, according to Boston-based research firm DALBAR.
Why? Typically, it's because they pulled their money out and then missed the big rebound when the market started to bounce back.
This year, we saw it again in August, when the market had its worst week since 2011 on fears about China and its slow growth.
Paying too much in fees.
You can't say the truth too often: Canadian investors who stick with old-school, activelymanaged mutual funds get rooked on fees. (The fees on Canadian equity mutual funds average 2.42 per cent, the highest in the world.)
I can't say this is strictly a mistake, but we also found out this year that Canadians are being taken advantage of in another way by the mutual fund industry. Bear with me while I explain.
There are two kinds of funds in the world: actively managed funds, run by highly paid stock pickers who try to beat the market, and index funds, which are much cheaper and which only try to match a market's return. Many index funds charge 0.3% or less.
The index funds have been shown to beat the actively managed funds over time. Now, it turns out the active funds have been borrowing the index funds' strategy -- but still charging people for stock picking.
If you're paying a high fee for exactly the same service, doesn't it make sense to switch?
Not investing at all.
Every year we see people delay getting into the market for a million reasons, some better than others: they are saving for a an education or a house (not bad reasons); they are too busy to investigate the options; they procrastinate; or they're afraid (not good reasons). 2015 was no exception. But every year you add to your investment life pays off in spades at the end, due to the power of compounding.
Cashing out emergency funds to pay non-emergency bills.
It might seem strange for an investment company CEO to stay this, but I want you to have a good bit of money in cash -- at least three to six months worth of expenses -- in cash. That's why I wrote what I did last week about controlling your holiday spending, for instance. Having a cash reserve is the foundation of being a successful investor: it's when you have enough to cover emergency expenses that you can begin to build a budget for investing monthly.
Not investing in yourself.
At the end of the day, you'll earn much more from your career over the years than you will from investing. Find what you love, so you can do it with a passion and do it well. And if you're doing something you don't love, find a way to change. That's why my first Wealth Matters column in 2015 was 6 Steps To Change Careers Without Destroying Your Financial Life.
Here's to a health and happy new year full of better investing and financial decisions in 2016.