40 Financial Lessons In 40 years (Part 1)

I turned the big 4-0 recently and thought it would be good to do a 40 financial lessons in 40 years post. I had a great day, it was sunny, and I spent it with my loved ones, my kids didn’t seem to fight that day, and got to go on the hunt for birthday freebies in Vancouver. What more could a tired mom ask for (other than alone time).

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I have decided to separate these thoughts into two blog posts, this first part is about investing lessons and the second part is about general personal finance lessons. Here’s Part 2.

As some readers may know, I had a bit of an audacious goal to get a 7 figure investment portfolio by 40. About 5 years ago, my portfolio sat at $280,000.

Here’s what I learned on the journey to the double comma club.

1. Don’t Underestimate the Power of Compounding

Albert Einstein said the 8th wonder of the world is compounding. And he is right. It’s just amazing. You won’t know it and cant’ really see it at a $100,000 portfolio but you can definitely see it at a $1,000,000 portfolio. Daily fluctuations are in the thousands.

I often use a compound interest calculator to run numbers to see what the future holds. Try for yourself as it might motivate you to invest for your future.

If you save $1000 a month starting at age 30 (and have $100,000 in your portfolio already) by age 60 with a annual expected return of 7%, you will have just shy of $2,000,000.

2. Keep Investing Simple

It’s tempting to think of investing as very complicated. However, thanks to pioneers like John Bogle who created the Vanguard funds, it can be as simple as making sure you have regular contributions to your portfolio.

Especially with things like one ticket ETFs.

These one ticket ETFs rebalance for you so you don’t need to worry about it.

One example is the VGRO ETF by Vanguard.

3. Compare your Portfolio to the Index

Some people might say that you shouldn’t compare yourself, but I like to compare myself to the benchmark indices. If you’ve got a financial advisor or you’re DIY stock picking and areseriously lagging behind the main indices, then you should rethink your investing strategy.

This is what helped me realize that I needed to switch from a solely dividend stock investing strategy to strategy that incorporated more of the index and more US investments.

I think I was getting 2% returns on my Canadian heavy portfolio at the time, compared to the benchmark at the time of 8%.

Wealthica (free investment portfolio tracker) has a great feature in their Power Ups section that lets you compare your portfolio to the index and specific ETFs or stocks.

With this tool, you can see how your portfolio compares to the S&P/TSX and the S&P500 for the past 12 months, or year to date.

As you can see here the S&P/TSX has returned under 6% for the last 12 months whereas the S&P500 has returned over 14% in the last 12 months.

4. Automate your Investment Contributions

The reason many don’t do well with the stock market is because they let their emotions take over. When you invest automatically you have the power to override your lizard brain.

Although the math shows that investing a lump sum works out better financially, there is some comfort knowing that you may buy low, buy higher sometimes but over time it will work out.

Set a frequency and stick to it. If you want to invest $1000 monthly, do it, and don’t just put $1000 cash into your investment account and do nothing with it.

Here’s the best way to invest money in Canada (and how to do it).

5. Have an Investment Contract with Yourself

I recall getting this idea from the book The Intelligent Investor, with an example of an Investment Owner’s Contract.

In it the contract states you will invest an X amount of money every month and acknowledge that you will be tempted to buy when a stock goes up and be tempted to sell when a stock goes down, but you will not fall for that trap.

Here’s an excerpt of the Intelligent Investor’s contract on Goodreads.

6. Start Saving and Investing Early

As mentioned earlier, the power of compounding is even more powerful the earlier you start. The key factor is time.

Here’s a Visual Capitalist animated chart of the benefits of investing early in life. 50% of your wealth at age 65 comes from your 20’s when you invest $250 a month from the ages 20 to 60.

The snowball keeps adding snow and the bigger you have it earlier in life, the bigger it will get later in life.

If you’re a younger millennial, here’s a guide on how to start investing.

7. Don’t be Scared to Invest

Many people are too scared to invest, thinking that it is too risky. It is also risky putting your money under your mattress while inflation runs rampant and the cost of living becomes expensive.

It is also risky putting your money in a savings account and not investing over the years and you will be losing money to inflation even though you think you’re saving money.

8. Don’t Waste Your Time Day Trading

When I was starting on my investing journey in my twenties, I wanted to get rich quick. I started day trading…and would wake up as early as I could at 5am PST to make a few trades before my job started. I also did swing trading.

The only person making money at that point was my brokerage (which is still Questrade) with all the commissions adding up.

It didn’t dawn on me that I was actually investing in businesses and not playing slots at the casino.

Thankfully I learned from that financial lesson.

9. Don’t Time the Markets

Timing the markets mean trying to buy low and sell high, or making sure you sell when you’re “at the top”. The market goes in cycles. Mr. Market is moody and irrational and unpredictable over the short term.

Investopedia mentions a Charles Swab study that shows yes you will come out ahead if you have perfect timing but the chances of timing the market perfectly are slim.

Therefore the best approach is to invest when you have the money in a lump sum, or if you are averse to that, invest regularly through dollar cost averaging.

10. Stay Invested (Time in the Market)

Time IN the market is better than timing the markets. Stay invested, stick to your plan.

This Visual Capitalist chart illustrates the pitfalls of timing the market. If your money wasn’t invested in the 10 best days of the market, you could lose more than half of your overall return on investment.

From 2003 to 2022, $10,000 invested in the S&P500 would yield almost $65,000 but if you missed the 10 best days (which were mostly in 2008 and 2009), you would miss out on more than half of your investment returns than if you kept your money invested.

11. Keep your Fees Low

I had a friend who told me she was using her family’s financial advisor, who was ‘only’ charging a fee of 1%. 1% doesn’t sound like very much, but for a $500,000 portfolio (which will happen, you will get there and more), that’s $5,000 ANNUALLY.

Not only does that erode your investment returns over time (compounded), but frankly I would prefer to go on a trip (or two) with that kind of money rather than get taken out for coffee once or twice a year by a financial advisor.

Any kind of money that isn’t compounded (and goes to fees instead) works like a cog in the wheel of the well oiled compounding machine.

If you have $100,000 invested and if the account earned 6% a year for 25 years and no commissions or fees, you will end up with around $430,000.

Now let’s throw some fees in there. If you paid 2% a year in fees, after 25 years you’d only have about $260,000 compared to $430,000.

That’s eroded almost half of your returns, all that from “just” 2% in fees which impacting the power of compounding. Here’s a Vanguard graph illustrating this point.

My fees only cost $143 last year according to Wealthica (a free investment portfolio tracker in Canada that I like to use), this represents about 0.01% in fees. Of course, I pay MERs on my ETFs, some of which are around 0.22% but this is still pretty low compared to the standard mutual fund fee in Canada of over 2%.

12. Dollar Cost Average

CNBC shares a study in which they looked at rolling 10 year returns on $1 million starting from 1950, and for a 100% stock investment portfolio, lump sum investing outperformed dollar cost averaging 75% of the time.

Although investing a lump sum is shown to outperform dollar costa averaging 75% of the time, dollar cost averaging helps me sleep better at night and it helps me feel organized sticking to my plan of investing X amount of money per year.

It’s definitely better than the alternative of not investing at all and sitting on the side lines with cash.

Here’s more on what dollar cost averaging is.

13. Set up Tax Efficient Investing Initially

If I were to go back 20 years I would have probably set things up more efficiently tax wise. However what I ended up with is not a big deal as I fixed it down the road, for example I moved most of the dividend paying US stocks into my RRSP.

Here’s a post on tax efficient investing in Canada.

Here’s a step by step guide on how to invest your TFSA with Questrade.

14. Hybrid Investing Gives You the Best of Both Worlds

There are dividend investors and there are index investors.

Sometimes these two don’t seem to get along (especially on #fintwit it seems) because one type of investor is espousing how superior their particular style of investing is compared to the other.

Then there are the investors that have 100% of their investment portfolio in Canadian dividend bank and utility stocks…but that’s another story.

However, I found that marrying both the index investing style and dividend investing gives me the best of both worlds. You get the growth of index investing and you get the cash flow of dividend investing.

I try to keep 50% of my portfolio in ETFs and 50% in dividend paying stocks, but later down the road I’ll be increasing my ETF allocation.

15. Invest According to Your Risk Profile

Basically you have to invest the way that would allow you to sleep at night. If you can’t fathom seeing a 50% drop in your investments then maybe you shouldn’t be invested in 100% equities.

Also think about the time horizon. If you are investing for retirement and you are 25, then you have a long time horizon ahead of you and can stand to take a little more risk.

In addition, if you are investing in individual stocks the 5% rule is a good one to follow, not investing more than 5% of your portfolio on an individual stock.

16. Have Cash on Hand to Invest

Again, the math doesn’t make sense for this one but investing isn’t always purely about math but also about psychology. I had a relatively large sum of cash (over $100,000) to invest and readers questioned why I had some much cash on hand just ‘wasting’ away just sitting there collecting dust.

However, when the Black Swan event that was Covid in 2020 happened to the markets, I had a lot of cash to invest. I brushed the dust off that cash and put it to use when the circuit breakers were triggering. It helped soothe my slight nervousness as I saw the investments drop significantly.

Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent

If you do decide to have individual stocks in your investment portfolio, please be aware that there will be some winners and there will be some losers.

If you made a poor decision or if the company that you invested in changed management or seem to be taking a wrong turn, don’t let your ego influence your investing. Cut your losses if you need to and don’t take it personally.

18. Passive Income Doesn’t Come Instantly

Jeff Bezos once asked Warren Buffett: “You’re the second richest guy in the world. Your investment thesis is so simple. Why don’t more people just copy you?”

Warren Buffett said: “Because nobody wants to get rich slow.”

It takes at least a decade of consistent saving and investing to be able to see some decent passive income from your investments, but once you see the snowball start to get bigger, the momentum continues to build and the snowball almost seems to get bigger by itself.

Once you have your investment strategy in place and you stick to it, you will be able to see growth year over year. It’s fun to graph it out to see the snowball build.

You can download a free dividend yield spreadsheet here.

19. No One Cares More About your Money Than You

One of the most important things to realize is that no one cares more about your money than you. I learned this the hard way when I started investing, after sitting through an Investor’s Group presentation and signing up for a mutual fund. A year later I was baffled why I was losing money when the market was doing relatively well that year.

I remember the financial advisor brushing me off. I wasn’t sure if this is because I was a woman, or if that’s how they usually treat their younger clients. The financial advisors didn’t really care about my money but they did seem to care about securing their commission when I first signed up for the mutual fund.

I decided to ditch the sales people and became my own financial advisor. There were some years that I didn’t do very well, but switched my strategy and have been doing better since.

That’s the beauty of DIY investing, you don’t have anyone to blame except for yourself. Some people don’t like this approach and want someone to put the blame on, if their investments are not doing well, but I prefer to take more ownership since it’s my money after all. I earned it.

20. Your Portfolio is a Manifestation of Delayed Gratification

Finally, last but not least, know that every dollar in your investment portfolio is well earned and a symbol of delayed gratification. Instead of buying a new iPhone every year, you invested that money and only bought a new phone every five years.

Being satisfied with what you have at the present moment is a secret to life happiness and building wealth. Gratitude is the key. The feel good dopamine hit you get when you buy a new Louis Vuitton bag or a new fancy car is unfortunately just temporary.

I believe that meditation and investing are very similar.

Of course we want to invest until we have ‘enough’ and not just continue to build the portfolio just for the sake of building it. But once you have your enough invested, you will not have to worry about money as much for your future.

Achieving financial freedom initially and then spending your money on things or experiences that bring value to your life will be even more gratifying knowing that your snowball is still building and getting larger despite taking a small chunk out.

Here’s a video from Charlie Munger talking about delayed gratification. Unfortunately, we are born being able to handle delayed gratification or we aren’t…but if you can cultivate delayed gratification you will lead a successful life.

I hope these financial lessons were helpful for you as they were for me so far in my financial independence and investing journey.

I went through a lot of investing mishaps and mistakes. Here are the 7 stages of investing and enlightenment is at the 7th stage.

Next week I’ll share 20 more lessons but with a more personal finance lens.

Here they are.

Do you have any other investing lessons that you would like to share?