I am getting started. This week, I've used Alison's step-by-step advice to do an inventory of my investments and figure out a few things like: What is my true risk tolerance? Am I really a risk-taker? Will taking big risks really pay off? What is my ideal asset allocation? How far away am I from that ideal? How much am I paying in mutual fund management fees? Can I switch products to reduce those fees?
I have a TFSA, RESP, RRSP, and non-registered investment account. That's a lot of decision-making and too much math for me, but you know what? I had a look at my self-directed investment profile with the bank I use and found that they have an online tool that does all this stuff for me once I set a few parametres such as a goal, timeline and asset mix. I started with my RRSP because my goal is simple: save for retirement.
Saving Money While Saving Money in my RRSP
After a good hard look at the major differences between the pie chart that should be and the pie chart that is, I did two things. First, I needed to add some US equities to my holdings (I had none before) but what to buy? In the interest of following Alison's advice to keep management fees to a minimum (because every dollar matters when you are talking about compounding growth), I used the mutual fund screener on my investing site to find a US equities mutual fund that charges less than a percent in annual fees and has no load (no fee for buying or selling). I found an index fund that charges a reasonable 0.7% management expense ratio. But that's not all.
What was really interesting for me about Alison's insistence that we pay as little as possible for our investment vehicles (she's a huge fan of ETF's and index mutual funds), I looked at the management fee for one of my bond funds. The fee is 1.76%. That means that if the fund earned 5% in 2011, then my money actually only earned 3.24% because the fee comes off the top. That's really bad if the fund has negative growth. I still have to pay the fee!
I looked for a lower cost option and found that the company offers the same fund with a more reasonable fee of 0.9%. What's the difference? To get the lower fee you have to have a much higher initial investment. Thanks to my years of savings, those savings were enough to buy into the new fund. I did a switch (no charge incurred to move my money) and now my money is making an extra 0.86% every year. Very nice! Thank you Alison!
Discipline = More Money
Now that I'm on my way to getting the right asset mix for my goals and making more money by reducing management fees, I have to be disciplined about it. Alison makes it very clear that the key to making long-term financial gains with your investments is to stick with your asset allocation and rebalance your portfolio a couple of times a year or maybe once per month. That means if one of your investments is doing really well and starts to take up a bigger slice of the pie chart, you need to do the tough job of selling it back down to the percentage you are trying to maintain. That's not easy but a quote from the book makes the case for being a disciplined investor. She writes,
"Wealth managers tell me privately that 60 percent or more of the money they make for clients comes from the discipline of selecting an asset allocation, maintaining it through the ups and downs of stock markets and interest rates..."
Some of the other nuggets from the book for me were the charts at the end that show returns based on different risk profiles over the long term. It turns out that conservative investors tend to do better in the long run. I also appreciated her discussion of the power of dividends and her insights into the blossoming ETF market.
If you are not an investor yet, don't worry. The first two sections of the book are tailor-made for novices and will get you going. Alison makes it easy to start investing and simple to keep up. And, as you can see from my RRSP example, counting on yourself Alison-style can make you a little bit richer. Click here to buy a copy of Alison's book or visit her financial education website at www.alisongriffiths.ca.
Copyright 2012. Laura Thomas. All Rights Reserved.
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