5 Key Philosophies for Long Term Investing Success

This is a repost from July 2014.  I was going to write a similar article this past weekend, but decided to pull this one out instead with a couple of extra points to the article.  I hope you enjoy!

Over the years, I have received a number of emails from people just starting their investing journey on how to invest.  More often than not, beginners ask which stocks they should buy.  There is much more to investing than just picking stocks.  In fact, I believe that starting out with individual stocks is a mistake and simply too much work (and risk) for rookies.

From my experience with investing, there are several overarching investment philosophies to increase your chances of long term success.  I believe that following the investment rules below will result in more money in your nest egg.

1. Invest for the long term

You may have heard the mantra to “buy and hold” your stocks, ETFS and/or mutual funds and there is good reason for that.   History has shown that the broad stock market (S&P500) has never lost money over any 20 year period (even after inflation).  You would think that the 20 year periods that include the great depression, super inflation 80’s, or the credit crisis would have been terrible for investors.  However, providing that they held through the period, their portfolios would have grown adjusted for inflation.  The longer you hold, the better it gets as the 30 year period returns are even better.

What I also like about the concept of buying and the\holding is that it eliminates second decision of selling.  Remember, when you trade in and out of stocks, you need to make two decisions.  The first is the easy one, buying.  The second, which is much harder, is deciding when to sell.  Unless you plan on doing a lot of your own stock research and watching stock charts regularly then buying and holding for the long term is your best bet.

If you have the urge to trade in and out of stocks, then why not set aside a small amount of  “play” money strictly for trading.  I have some USD set aside just for this purpose where I play with high beta momentum stocks.

2. Reduce your Management Expense Ratio (MER)

You may have read the articles about Canadians paying very high fees for their mutual funds.  A MER is the fee a mutual fund charges for the privilege of owning it.  While the MER does not come out of pocket, it comes out of the fund returns.  Funny thing is that most mutual funds do not beat their respective indices (ie. canadian equity fund vs. canadian index) after their fees.  Mutual funds do even worse if you look at long term performance.

While one or two percentage points do not sound like a big deal, it can have a significant impact on your overall portfolio size over the long term.  Reducing your MER from 2% to 0.3% can result in a portfolio that is 60% bigger at the end of 30 years.  Yes, that’s right, 60%.

3. Stick to an Investment Strategy

This point ties the above investment philosophies nicely.  I have a couple favorite investment strategies – index investing and investing for income via dividend growth investing.  Sticking to a proven long term investment strategy will help you keep your eye on the ball, help prevent too much churn (too much selling) at the wrong time, and help reduce taxes.

I commonly recommend that investors index their portfolio.  Indexing is a passive way to buy the broad stock market (own thousands of stocks) without having to actively pick individual stocks. By simply betting on the whole market,  statistics show that indexing will beat most active mutual funds over the long term.

Picking index mutual funds, like TD e-series, will bring your total portfolio MER down to between 0.35% and 0.50%.  Even regular, run of the mill index funds will have a MER around 1% which is much better than active funds that charge 2% or more.

The best solution for indexing is by using ETFs due to their low fees.  For example, iShares XIC covers the Canadian market and charges only 0.05%.  Vanguard’s VTI, which covers the entire US market, also has a minuscule MER of 0.05%.  Throw in an international index ETF and a bond index and you have yourself a very low cost portfolio (examples of index ETF portfolios).

While many of my articles are about dividend investing through buying individual stocks, much of our overall portfolio is indexed.  Our indexed portfolios include our family RESP for two children, my wife’s RRSP, and the international exposure in my RRSP.  We are in the process of opening a new non-registered account for my wife, which will also be indexed using ETFs.

4. Reduce your Trading Fees

While not as significant as reducing your MER, reducing your trading fees can make a difference to the overall return of your portfolio, especially when you are just starting out.

How do you reduce your trading fees?  By picking the right discount brokerage.  Pick one that doesn’t charge you annual fees, and offers low trading commissions even with a low balance.  As well, look for a brokerage that will reduce your foreign exchange (FX) costs.  One way to keep FX costs low is via DLR/DLR.U trading combination.  You can read more about DLR here.

ETFs are traded like a stock, so buying and selling typically incur a trading commission.  With the competition between brokerages rising, some brokerages are offering free ETF trading.  The brokerages that offer free ETF trading include Scotia iTrade, Virtual Brokers, QTrade and Questrade.  We have a number of accounts and still recommend Questrade for the investor that is just starting out with a low balance.

Here is a complete comparison of discount brokerages for Canadians.

5. Reduce your Taxes

While investing decisions should not be for tax reasons alone, taxes need to be taken into consideration.  Even those who only plan to invest in tax sheltered accounts (RRSP/TFSA) need to understand tax efficiency.  In this case, an important point to remember is that US dividends face a withholding tax within a TFSA, so best to keep US and international equities in an RRSP.

What about the high savers who have more savings than contribution room?  That’s where non-registered accounts come into play, and where the tax efficient placement of investments is important. To learn more about the background of investment taxation, you can learn more about capital gains tax here, and interest tax here.

At a high level, the highest tax efficiency is if you keep all investments in tax sheltered accounts.  However, if you have outgrown your registered accounts, US equities, international equities and bonds are generally efficient within a RRSP.  Canadian REITS and bonds are efficient within a TFSA, and Canadian equities work well in non-registered accounts.  For more details, check out my article on which account to place your investments for maximum tax efficiency.

Final Thoughts

For a new investor, I realize that this can be a lot to take in.  The overarching theme to successful investing is to keep costs low, hold for the long term, keep it simple with index ETFs, and minimize your taxes.

There is a lot of investing experience in the MDJ readership, so please leave your tips in the comments.

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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3 years ago

Thanks for the above points. But one question—is investing in stocks for a long term worth it? Or should it be for a short term?

Lost in Space
5 years ago

Stick to an investment strategy is one of those underrated gems and one of the key rules for those who have beat the market long term. Adjusting your strategy is normal going with the flavour of the day is a great way to loss money fast.

One point I never understood about DGI investors is why they never take profits. Back in 2013 I bought either BMO or RY (can’t remember off hand) and sold it for a nice 20% profit but I sold it too soon, it eventually soured some 50% before coming back to the price I bought it at. Those who buy and hold left a substantial amount of money on the table, sure you got dividends but 4 dollars or so but you also left some $30 of profit on the table.


5 years ago
Reply to  Lost in Space

DGIs don’t take profit because their long-term goal is income generation in retirement, and on that they focus, not capital gains.

Your example demonstrates how difficult it is to time the market. Even though you took profits, you got it wrong.

DGIs might be able to grow their dividend producing capital faster via buying and selling, but what is the risk?

5 years ago

Long time reader, first time poster. I’m hoping to get feedback from any and all on my newly created ETF investment plan. Once I set my target allocations I had a tough time choosing between so many similar ETF’s to meet each sector. I mostly considered MER’s, and volume. Since I have a DB pension I consider that my bond allocation and invest personally in 100% equities.

Because I’m new I want to stick with only Canadian listings.

For the US portion, my personal rule is I buy VUS (hedged) when CAD is <.75 and buy VUN (unhedged) when CAD is greater than .75

US 40% – VUS, VUN
Global Developed ex US 35% – VEE
Canada 10% – XIC
Emerging 10% – VEF
Speculative individual stocks (moon shots) 5% – unused so far

Thanks to FT and everyone for setting me on this journey!

5 years ago
Reply to  mcgillickerr

“Speculative individual stocks (moon shots) 5%”

This makes absolutely zero sense.

First, you must be convinced that index investing is the best strategy for your money…well, 95% of your money. So…where’s the logic in applying ‘not the best strategy’ to any portion of your money? It’s like knowing drinking tequila makes you barf but you keep slamming a shot at the end of every party on the off chance you don’t barf.

Second, you must know by now that almost all data concludes only a very small percentage of investors beat index returns with any degree of regularity. With your approach you are admitting that you can’t beat the index 95% of the time, but the other 5% is all jackpot. If that’s the case, then why not throw 100% of your money into the 5% strategy? If it’s not the case, then why waste, literally, 5% of your money and subsequent returns?

This is a very dissonant approach to personal portfolio management and I cringe every time I see it.

You’re welcome.

5 years ago

Great summary. For those who are just starting out, buying a solid Vanguard ETFs are probably one of the best and easiest investing strategies.



6 years ago

Yet another interesting Index graphic:

“Returns represent total annual return (reinvestment of all distributions)…”

S&P = 4.28%
AA = 7.41%
Average of All Classes = 6.66%

The above makes a good case for market timing, asset allocation, and active investing in general.

If the average equity investment life-span is 30 years, and the average 30-year return for the S&P is ~10% per annum, and the current below-average streak represents ~50% of both eras…you better hope you’re raking in at least 16% total returns for the next 15 years running. Good luck.

Also notice the Asset Allocated Index (AA) with only 15% of S&P and 60% of equities in total, yet is close to doubling the mid-range return of 100% S&P/equities.

One asset not shown, gold — the antithesis of stocks — pulled down a total annual return of 11.2% over the same time period, more than 2.5 times that of the S&P. The other non-correlated asset, REITs, had a total annual return of almost 13%. Lost decade, indeed.

Key Philosophy #6: There is a time and place for everything.

6 years ago

Since 70% to 85% of actively managed domestic equity funds perform no better than index funds or exchange-traded funds (Morningstar), I would think that index funds will be more likely to build wealth than mutual funds.

Unless you can select the mutual funds that will win … remembering that past performance does not necessarily determine future performance. I used to think I could pick the winners but I found out by experience that I could not. Just too hard to predict the future, even for the managers with good track records.

I now have a diversified set of individual securities only, no EFTs or mutual funds. I might look at their contents for ideas, but that’s about it. I just want to own pieces of businesses that I understand and that I am willing to keep for a very long time. It is serving me well.

6 years ago

What the data shows is that active fund positions are never 100% long, thus they never reap the full Bull/Bear.

What is not shown, however, is the degree to which the two beat each other, which is important, especially if you are paying for active management. Perhaps someone else has this data.

In the world of finance, indexing is a mid-grade investment; it’s not lousy but neither is it stellar. I seem to recall someone saying indexing is a store of wealth, but not a wealth builder…

p.s. — Ed doesn’t pay enough. ;)

6 years ago

At SST #32. That’s interesting. Could it be that the index stays fully invested during the market fall while the fund sell part of its holdings and buys again once the market has become cheaper, therefore the gap is the difference?

On the other hand, a person that sells when the market falls, likely fails to recognize the market is cheap and won’t buy at or near the bottom… the fund likely fails to recognize it as well but it must trade to justify its own existence… which in this specific case, is a good thing.

I don’t know. But 60% is close to the mid range of 50%… so overall, the index guarantees you average return… the funds will either beat the index or do worst… SST, are you again! agreeing with Ed and is “super” fund manager concept… That would be a third time in short period that you guys get along philosophically. I think SST will work for Ed by years end. lol.

6 years ago

re: “Index Your Portfolio — By simply betting on the whole market, statistics show that indexing will beat most active mutual funds over the long term.”

Sungarden Investment Research did a study which provided the consistent conclusions: i) during the last two Bull markets, the index outperformed active funds by 80% and 63%, and ii) during the last two Bear markets, active funds outperformed the index by 66% and 62%.

“When we averaged all 24 combinations of time frame and peer group, the index beat about 60% of funds.” — SIR

The take-away?
Be passive on the way up, be active on the way down.

A Frugal Family's Journey
6 years ago

Great Post Million Dollar Journey! While our blog often talks about our investments in individual dividend stocks, most of our investments our tied to index funds. We don’t talk about them because, quite frankly, they are just not that fun to talk about. :)

I have started to build a dividend stocks portfolio whose dividends has grown quite nicely. But at the end of the day, we know that low cost index funds is our bread and butter.

Wishing you continued success in your personal journey! AFFJ