3 Scary Things That Lurk Inside Your Portfolio
Investing can be exciting, but just like Halloween, it can also be downright spooky. Everything from high fees to a lack of diversification can scare away decent investment returns. By being aware and paying close attention to your portfolio, you can help stop them. Here are three scary things that lurk inside your portfolio.
High Fees
One of the most popular Halloween costumes is a ghost. Making a ghost costume can be as easy as taking a bed sheet and cutting some eye holes out. So, what do ghosts and high fees have in common? Plenty.
We’ve discussed high fees plenty of times. Similar to ghosts, high fees are invisible. I like to call high fees the “invisible destroyer of wealth.” You may not think an MER of 2.5 percent seems like much, but on an investment portfolio of $500,000, that’s $12,500 in “invisible” fees you’ll be paying each year. Still think those fees are like Casper the Friendly Ghost?
How do you avoid scary investment fees? The simplest way is to purchase ETFs. Instead of funds with loads, ETFs come with ultra-low fees. By investing in ETFs like the ones offered by Smart Money Invest, you can save thousands in fees over your lifetime and avoid a Halloween horror.
Lack of Diversification
Another scary thing that may be lurking inside your portfolio is a lack of diversification. Many Canadian investors suffer from something called “home bias.” To understand home bias, it helps to look to Trick-or-Treating. When going Trick-or-Treating, you’re more likely to stay close to home and only visit houses in your neighbourhood (unless you live on a farm). The same can be said for investing. Canadians would rather invest in Canadian equities, ETFs, stocks and bonds. While there’s nothing wrong with investing in our great country, it can become problematic when you invest too much of your portfolio in the red and white. Canada is a country with three main industries, while the U.S. has 10. If one of those industries like oil and gas falls upon hard times and you’re investing 100 percent in Canadians equities, your portfolio will be hard hit. That’s why it’s important to diversify by investing in Canada, the U.S and internationally. That way if Canada is underperforming, other countries and regions are likely to offset it.
Not Paying Attention to Performance
Don’t dress like an ostrich for Halloween and stick your head in the sand. There are consequences for not paying attention. If you don’t pay attention to how many Halloween candies you’re eating, you’ll wake up in the middle of the night with a tummy ache. The consequences for investing are a lot more severe.
If you’re investing in an actively managed fund like a mutual fund, it’s especially important to pay attention to performance. How do you measure how your investment is doing? By assessing it against a benchmark like the S&P/TSX Composite Index. The facts don’t lie: most actively managed funds underperform the benchmark long-term. That underperformance means you might not be able to reach your long-term goals like homeownership or an early retirement.
Instead of putting your investments on autopilot, take the time to review your statements and see how your investments have been doing over the last five years and beyond.
Now that you’re aware of these scary things, you can hopefully avoid them. Happy Halloween, everyone!