When people say the words, “learn from my mistakes,” whether it be a preface to a long-winded discussion or the conclusion of some argument, I am always all ears! My first football boss, Michel Leveille, once told me that if I really wanted to be smart, I’d learn from my mistakes, and if I wanted to be smarter still, that I should learn from the mistakes of others. This post is all about that kind of logic, and how not to invest in the stock market, especially when you are just starting out.
Here’s the background story:
When I was about 18-years-old, I saved up enough money through my summer job to put away $2 000 in a non-registered (i.e. fully-taxable) investment account, through which I purchased some 250-odd shares of Bombardier Class B common shares. Right away, a more seasoned investor would have spotted at least one, and hopefully two, significant flaws in my plan. Here’s another one: the account carried a management fee of $25 per quarter (or $100 a year – it’s always healthy to evaluate investment decisions from a longer-term perspective!). This fee would have been waived if the account held assets valued at over $15 000 or $20 000…I can’t remember the exact figure. In any case, as a younger investor, I was a long way away from being able to keep my money in the account for free.
Fast-forward almost eight years later to the spring of 2015. Bombardier, which has basically experienced an entire decade+ of poor stock performance, saw its stock fall to well under $3 a share (I bought it in the high-7s, thus giving me a paper loss of over 50%…). Through the years, my taxable account built up a fee balance of over $700. I was never able to put more money back into the account (I was a poor university student, after all!), and so as my negative cash balance grew, and my declining stock assets collapsed further, something very sad and humbling happened. The investment brokerage saw that the value of my assets in the account was not great enough to cover the balance of fees (my liabilities), and so to wisely cover its ass, it automatically and without notice sold ALL of my Bombardier shares at their reduced value to pay off the balance. New investment account value: $0. Rate of return: -100%. How fun! An entire summer of careful saving, wiped out in one millisecond-long automated transaction!
Ok, so here’s what 18-year-old me did wrong, and what 27-year-old me would do now if I still had that $2K:
Mistake #1: Investing through a taxable account.
In Canada, we have the ability to invest through a number of tax-sheltered accounts, with the two biggest ones being the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). Personally, I find that both of these vessels are poorly named as the RRSP isn’t really a “plan” and the TFSA isn’t an everyday “savings account.” I won’t go into huge detail about how they work, but in short, they allow money to be invested in a tax-deferred (RRSP) or tax-free (TFSA) manner. Both of these options are preferable to investing in a non-registered taxable account, which should really only be used once an investor has completely maxed out their contribution room in their RRSP and TFSA. Nowadays, my investment funds are held in a TFSA. Why pay tax on investment returns when you don’t have to?
Mistake #2: Buying a single common stock.
The biggest downside to buying only one company with my $2 000 was that it left me exposed to the poor performance of just that one company. Bombardier has struggled mightily to bring its biggest-ever project, the C-Series commercial jet, to market in a timely and cost-effective manner. A huge portion of the company’s future earnings depend on the success of this aircraft, which so far is billions of dollars over-budget and over two years behind in its delivery schedule. No wonder the stock has had a rough go of it! My one-stock portfolio left me with practically no diversification, which breaks one of the golden rules of financial risk management. Presently, I’d much rather go and put my money in a broad-based, passively-managed, low-cost index ETF which will give me exposure to hundreds (if not thousands) of different companies, all through one single transaction. That way, when one company stock does poorly, it doesn’t lead to the total collapse of the portfolio.
Mistake #3: Paying for an investment account I couldn’t really afford.
There are only a handful of things that an investor can control when they put their money into the stock market, and one of those things is investment fees. Online discount brokers with low trade commissions, passively-managed assets, no-fee accounts…these are the tools that investors (and especially young investors!) should be looking for when starting out. Paying $100 per year in account fees as I did on an asset worth $2 000 is the same as experiencing a single-year rate of return of -5%! Goodbye growth of your money!! My TFSA doesn’t charge me an account fee (regardless of the value of the assets in the account), all I had to do was a bit of research to find the right discount brokerage.
So there you go, may my blunders be your lessons learned painlessly!
Got questions or concerns? Leave me a comment!
Do you know someone who is just starting out in the investment world? Give this post a share!
Until next time, have a great Friday!