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April 30, 2019

Four Simple Changes Sarah made to her Investments to Earn $4,400 more per year.

Sarah didn’t have a good experience with money – it was traumatizing to say the least. A lawsuit within the family that forever tarnished the relationship – things were never the same again, and at no fault of her own. Once her lengthy battle over an inheritance was finally settled, she handed the money over to an advisor and said, “I don’t want to deal with this, just invest this for me please.”

And so, the advisor did. Thereafter, she diligently stashed money into her investment account, maxing out her TFSAs and RRSPs each year. ?

As a conservative 30-something single gal with no family support, she wanted to ensure her financial future is secure, so she came to me asking for a financial plan to see if she’s doing the right thing and what her future would look like. ?

I was very impressed with her cash flow management – she lives a very frugal life in the city and saves about 40% of her income.

After reviewing her portfolio and work benefits, I noted the following four mistakes that were made as a result of blindly handing her money over to a financial salesperson at the bank (okay they’re called “financial advisors”): 

  1. Non-tax efficient investments;
  2. A risk profile that was not suitable for her;
  3. A poorly diverse portfolio
  4. High mutual fund fees

1. Non-tax efficient investments

Her previous experience with money steered her in a direction to adapt a “low-risk” profile. This means her money was invested in “balanced funds”, a combination of less “risky” investments (bonds) and higher risk investments (stocks). The problem was these funds were outside of her registered accounts, both RRSPs and TFSAs, which means those investments are subject to taxation! Any interest income from bonds (including interest from GICs or high-interest savings accounts) are subject to the highest tax treatment – it is treated like your employment income! Because Sarah was in a relatively high-income tax bracket, she was making peanuts after taxes were considered.

Note: It’s not a bad problem to have because in doing so means your TFSAs and RRSPs are maxed. This is when a tax-efficient investment strategy is critical, so that you minimize your overall tax bill and keep more for yourself!

2. A non-suitable risk profile.

In addition to the “balanced funds” not being a tax-friendly investment, it also impeded her returns. A combination of low-returns and high taxes equals supreme slow growth of money!

Note: I always say, if you’re young (you can define young!?) you have no business being in bonds! But of course, this has to fit into your overall financial plan. Sarah had no intermediate or immediate needs for money beyond her emergency fund. 

3. A poorly diverse portfolio.

80% of Sarah’s investments were in Canadian funds. This is wayyy too many eggs in her (Canadian) basket. She already works at a Canadian bank, receives employee stock options from her Canadian company, gets paid in Canadian dollars (duh!), and somewhat still rooting for the Leafs – this is a huge bet on Canada!

Note: North Americans tend to deem our own countries as super “safe”, so we suffer from home-based bias. While the U.S. and Canada are developed countries, keep in mind that different countries carry different types of economies. For example, Canada is very resource-heavy (e.g. oil and gas, mining & exploration companies), and the U.S. carries all the tech-darlings (e.g. Google, Amazon, Facebook, Apple), so remember to invest abroad! You know, Switzerland, Japan, England, Australia, Belgium are developed countries, too!

4. High mutual fund fees.

I saw that she was paying on average 2.3% on all her funds – and this is the average which means some funds were close to 3%! This amounted to over $4,400 in fees PER YEAR and will easily triple as the portfolio continues to grow over the next 30 years, with fees adding up to well over $250,000! ?

Note: High fees can eat into your returns BIG TIME. After I told her to consider ETFs, her costs are now a fraction – around 0.3% per year now.

After showing Sarah her alternative options, she quickly moved her money into ETFs where she is happily in low-cost, tax-efficient, higher-yielding investments.

Ready to start your investing journey as well? Grab a copy of your "Investing-Ready" checklist in our FREE resource library and see where you stand. Remember, everyone's journey is different, but there are a few things you need to check off before you start putting your money to work. Find out what these are in this checklist!

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