Blog for Financial Literacy: A Simple Plan

Today’s post is part of the Blog for Financial Literacy campaign spearheaded by Glenn Cooke of Life Insurance Canada.com. Glenn encouraged dozens of bloggers to devote their November 15 post to sharing their “single best financial tip,” in recognition of Financial Literacy Month.

Long-time readers of Canadian Couch Potato know I occasionally explore some pretty arcane facets of index investing. I hope this advanced information has helped serious index investors make better decisions, but I recognize it may have left some readers scratching their heads. With that in mind, here’s the single best financial tip I can offer: keep your investing strategy simple.

We need to get rid of the idea that successful investing has to be complicated. If you’re naturally curious like me, you’ll genuinely enjoy spending time and effort to learn the subtleties. Gaining a deep knowledge can be empowering, but it’s not essential. What’s more, it comes with the risk of analysis paralysis and the tendency to second-guess your decisions.

Do you disagree with one of the ETF choices in my model portfolios and want to substitute another? Go ahead. Nervous about European equities because of the rotten economy? Leave them out of your portfolio. Can’t decide whether to use a total-market bond fund or stick to short maturities only? Go half and half. None of these decisions is likely to make much difference in the end, especially if you’re just starting out. But if your agonizing is preventing you from implementing your investment plan, that’s a huge problem.

My point is not that the details are unimportant: it’s that they can distract you from the big picture. Any time you’re faced with a minor decision about your portfolio, step back and ask yourself the more fundamental questions: Do I have clear investing goal? Am I saving money regularly? Am I comfortable with my level of risk? Only after you answer those questions confidently should you trouble your mind about the short strokes.

As the proverb goes, perfect is the enemy of good. Just because some guy wrote a book about the Perfect Portfolio doesn’t mean there really is such a thing. A “good enough” portfolio will still help you reach your financial goals.

Are you Streetwise?

While we’re talking about simplicity, ING Direct’s newly rebranded Streetwise Portfolios are an easy way for indexers to get started on their journey. ING Direct Mutual Funds is looking to hire a team of “indexing champions” to coach Streetwise investors by phone and online, and they’ve asked me to help put the word out to readers in the Toronto area. (Team members will eventually have to get their mutual funds license, but this is not a prerequisite.) If you’re interested in learning more about the opportunity, contact Silvio Stroescu.

18 Responses to Blog for Financial Literacy: A Simple Plan

  1. Mandy @MoneyMasterMom November 15, 2012 at 1:28 pm #

    Found you via Life Insurance Canada. Gotta love that your best financial tip comes with a job opportunity. It`s a double bonus reading your tip today :)

  2. Canadian Couch Potato November 15, 2012 at 1:30 pm #

    @Mandy: Welcome! I will stop at nothing to help my readers. :)

  3. The SPY Surfer November 15, 2012 at 1:46 pm #

    I used to be an ING streetwise customer and later decided to build my own portfolio. What motivated me was two things: 1) The MER (1.07%) and 2) the fact that you can replicate most of these funds with low-cost ETFs simply by looking at their prospectus.
    Example: Streetwise Balanced Fund (http://www.ingdirect.ca/pdfs/en/en_streetwise_balanced_portfolio_summary.pdf) is roughly composed of 20% CDN equity, 37% CDN bonds, 22% US equity, 20% Int’l equity, and cash. Using Vanguard ETFs, you have VCE (MER 0.09%), VAB (MER 0.20%), VSP or VFV (CAD-hedged or not – both MER 0.15%) and VEF/VEE (MER 0.37% and 0.49%) respectively. Of course you would have to trade/rebalance yourself (cons = emotion, time) and add trading fees.
    I am not saying that buying funds is right or wrong.
    It’s just about knowing your options before making a decision.
    Hope this helps.
    Thank you CCP for your blog and the job posting!

  4. Canadian Couch Potato November 15, 2012 at 1:58 pm #

    @SPY: There’s no question you get the costs down with ETFs, but as you know, an ETF portfolio involves a lot more maintenance. For small portfolios and less-than-keen DIYers, Streetwise is a great place to start, though many people will likely graduate to something else later on.

  5. Canadian Budget Binder November 15, 2012 at 3:52 pm #

    Great tips. We really want to learn how to start investing but you said exactly what I worry about and that is second guessing ourselves. When you start to invest with your money you don’t want to second guess yourself or you may never invest it or you start the panic war. I always learn something new from you though, so thanks. Mr.CBB

  6. Andrew November 15, 2012 at 4:30 pm #

    What about savings rates?

    I think we fuss a lot about specific asset classes and their weights in a portfolio and forget that probably the bulk of the reason a person will have sufficient funds in an account in future is attributable to how much that person saves. For me the most important factor has been maximizing savings and I have found budgeting does not work and the best way is to just set aside a particular amount automatically (and invest it automatically if possible like through the TD index funds) every month and get used to living on the rest. I then ratcheted up the amount saved a bit at a time (and depending on income level) until it was at a limit of tolerance.

    I assume a zero return on equities in planning for avoiding bad outcomes so I save as much as I need for what I consider a good outcome with just the income portion functioning for returns. If I get a return over time its just a bonus.

  7. Peter November 15, 2012 at 5:00 pm #

    Yea I agree Dan, simplicity is the key to a good and sophisticated portfolio. And it does not have to be perfect, because when amount invested is not that high yet, other factors such as saving, risk management, and taxes are more important (as you outlined in your book).

  8. Al M November 15, 2012 at 5:55 pm #

    The “AHA” moment for me was learning the market has never failed to retrench to a previous number. Knowing that the market is not a rocket allowed me to develop what I consider to be the single most important factor, “Patience”. I no longer panic when the market moves (either way) as I will have the opportunity to buy or sell (rebalance) at previous highs and lows. It takes the pressure off to act impulsively, as I have a longer time horizon for my investments. I know we are supposed to only provide one tip but I cannot help myself. “Realistic Expectation” of returns finishes a tight second.

  9. SavingMentor November 15, 2012 at 10:33 pm #

    I agree 100%. Avoid paralysis by over analysis! That’s part of my financial literacy post as well but not specifically applied to investing like yours is.

  10. Jon Evan November 15, 2012 at 11:04 pm #

    The “Perfect Portfolio” is much cheaper and better than the ING alternative so I wouldn’t waste my money there. For the novice investor Dan’s important query that MUST be answered and is the hardest thing with investing i.e. “Am I comfortable with my level of risk?”. Going the mutual fund route I would recommend Steadyhand as a great beginning because they genuinely care about their clients and the handholding is of great worth especially during these days of red ink because the answer to the above question is not a static one! Besides, their returns are better as a bonus!

  11. Michel November 16, 2012 at 5:49 am #

    Good article Dan. I find that the biggest problem my friends encounter, is listening to a thousand ideas, and not being able to act on a few of them. It’s almost an excuse not to invest. But, I find that these people are the same in other areas of their lives, all talk and ideas but very little execution! I know a guy with the biggest library in the world of books on investing, but his portfolio is a mishmash of uncorelated ideas. No focus, that’s the problem!

  12. GDPS November 16, 2012 at 4:54 pm #

    Great work Dan! Any thoughts about the recently released Vanguard ETF’s and your model portfolios? I’m sure that constantly exchanging one fund for another can get expensive, however, could an investor consider these new options when entering your portfolio designs. Thanks in advance!

  13. My Own Advisor November 17, 2012 at 9:48 am #

    Great stuff Dan. I’ve always found simple plans are the best because anything complicated is just that.

    Nice subtle plug for the book as well. :)

    Enjoy your weekend!
    Mark

  14. Noel November 17, 2012 at 1:13 pm #

    I find the biggest problem with trying to get my friends to encompass index investing is that when the market drops they need hand-holding and reassurance that they are executing the most prudent strategy. This is a ‘service’ that brokers, financial planners and money managers provide but, in the end, it means little as it comes at the cost of returns that don’t match the appropriate benchmarks over the long term. In weak moments they often return to their previous advisers, to their detriment, sometimes never to come back to index investing.

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