As investors, we want to earn the biggest amount of money for the least amount of risk.

In my previous article about Asset Allocation, I wrote about different asset classes and the potential return we could get from them.

We will define risk as the probability of losing money. To be clear. In finance, there is not such a thing as zero risks. Even if you hide your money under your mattress, or in the safest bank, there is always the threat of inflation. In fact, I venture to say that by having money in your bank account, your probability of losing part of its value is 100%. To repeat: You are 100% guaranteed of losing money if you keep it in your bank account or under your mattress.

Ok, now we are forced to do something with our money. We have to expose our money to many possibilities out there. We want our money to go out, work for us, and come back to us with some earnings of its own.

To make sure our money has a good journey, let’s try to eliminate all the risks that we can eliminate.

Only consider no-load mutual funds

If you buy mutual funds, make sure they are no-load mutual funds. I think mutual funds with load are in its way to extinction, but there are many of them still out there and there are many astute commission-based advisors who will present persuasive arguments for you to buy them.

Don’t pay high fees for your investments.

In Canada, we have some of the highest mutual fund fees in the whole world. Financial institutions, commission-based financial advisers, and insurance companies are hoping that you don’t find out. And many people don’t find out. But there is a small group of people who are becoming aware of these high management fees and they are going elsewhere. Just to put things into context. A regular actively managed fund in Canada has an expense ratio of 2.75% while many of Vanguard’s ETFs have an expense ratio of less than 0.25%. That is 2.5% of someone’s money disappearing into the vortex of financial fees.

Don’t buy individual stocks

I don’t care about the reputation and history of any stock, all of them can go out of business.

in 1896 Charles Dow created the Dow Jones Industrial Average which consisted of 12 companies (American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal and Iron, U.S. Leather pfd. and U.S. Rubber). All those companies except one have disappeared. Those were the sure bets of the era. Today, the sure bets are the Googles and the Amazons, but they too, they will go into oblivion.

On the other hand, index funds are always evolving. Stocks that don’t meet their criteria get weeded out and newer companies are added to replace them. Index funds are infinitely less risky than individual stocks.

Don’t put all your money in one asset class

My friend was only interested in Facebook, Amazon, Google, and Apple. It took me a lot of effort to make her change her mind and to get a technology index instead. Nevertheless, I fell that we didn’t go far enough. We had all her investment in one economic sector. Her risk was too high. Unfortunately, that’s all I was able to do at the moment. Maybe next time we see each other we will diversify a bit more and reduce her risk.

Don’t pay more taxes than you need to

In Canada, we have a beautiful thing called TFSA (Tax-Free Savings Account) which is similar to the Roth IRA, and we have the RRSP (Registered Retirement Savings Plan) which is similar to the 401 (k). These are vehicles that allow us to pay zero taxes or to defer taxes decades into the future.

But that’s not all. When an investor has a taxable account. If those investments are in actively managed funds, the capital gains on those funds are taxed every year and those taxes passed down to the investor. Whereas, if the investor holds Index Funds, with little stock rotation, there are fewer capital gains to pay and, of course, fewer taxes.

Don’t pay an excessive amount for financial advice

My other friend has his money at an investment house. The advisor assigned to him has invested his money in mutual funds with high expense ratio. Those mutual funds already pay a kick-back (trailer fee) to the adviser. But in addition, the adviser charges an additional management fee to my friend. I have spoken to my friend a few times about not paying these additional fees but to no avail.

In short, Don’t pay unnecessary fees. You should be hiring a fee-only financial adviser. Listen to my interview with Justin Chidester.

Conclusion

Investing is full of risk, however, there is some risk that we can reduce or eliminate. Make sure your money has a safe journey when it goes out to work for you.

Related Posts

1. Picking individual stocks is the fastest way to go broke
2. Asset Allocation; bonds, stocks, commodities, gold and more
3. Active Managed Funds Under Perform the Index (Again)

Connect with me

I would love it if you connect with me via social. You can find me on Facebook, Twitter, LinkedIn,  YouTube, and Instagram.